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  1. Homework 7 Iron Condor Sensitivity Calculator
  2. Your final project (for the TH final) – an Iron Condor sensitivity tester
  3. The Iron Condor Expiration Payoff Mapping
  4. Slide 4
  5. Slide 5
  6. Slide 4
  7. Slide 5
  8. The HW objective and its relationship to the take-home final
  9. Slide 5
  10. Slide 4
  11. Slide 5
  12. The HW objective and its relationship to the take-home final
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Homework 7 Iron Condor Sensitivity Calculator Senior grades are due on Monday, May 7th. Therefore the take-home final must be returned to me by seniors on Thursday, May 3rd by 5:00 PM, therefore this homework should be completed by Wednesday, May 2nd, because you will need it to do the TH final. You are allowed to seek help from other classmates in completing this assignment and can also ask for help from me, although my accessibility is hit or miss in the final week of school. This homework requires that you have completed homework 6, where you were to have designed an options pricing model using historical daily volatility. This homework uses an Excel workbook entitled Iron Condor Spreads, probably available as ICS.zip. The Iron Condor at the San Diego Safari Park earlier this year ... Your final project (for the TH final) an Iron Condor sensitivity tester In a strangle, you go long with an OTM put and call near the strike price, and are betting mostly on a volatility increase and fighting time decay. Your maximum loss is limited to the size of your bet. With an iron condor, your primary bet is the opposite of a strangle. You write (short) an OTM call and put near the strike price. This is a bet on falling volatility where time decay works in your favor (hence the popularity of condors). However your potential loss is much, greater than the size of your investment. For that reason you must hedge your condor by buying a call and a put that is considerably more out of the money, which caps your loss but substantially cuts into your cash gain. Our Iron Condor of April 18, 2012: The Iron Condor Expiration Payoff Mapping Lower floor provided by 124 Long Put, which cost $0.80. The primary bet was writing a strangle consisting of a 132 call for $1.25 and a 128 put for $1.64 when DIA was at $130.36. Upper floor provided by 135 Long Call, which cost $0.35. Possible Prices of DIA on May 19, 2012 This is a cash-positive bet on low (and lower) volatility. You are net cash positive and want to stay that way. This is a version of my Iron Condor Sensitivity Calculator which you will not use in this homework except for reference. This version uses the iterative technique discussed in class to calculate the Implied Daily Volatility of these four options given the actual prices of the stock and the four options and the strike prices at a moment on April 18, 2012. Because we are selling a strangle near the money and buying a more distant strangle for a hedge, this 4-way transaction is net cash positive ($1.74 per share). The Sensitivity section allows you to override volatility or stock price and calculate time decay in any desired combination. Page 1 spread This is the (less useful) version of the iron condor net spread calculator that you are being asked to complete for the homework. Instead of using existing options prices to calculate IDV, in this easier example you are asked to provide the historical IDV to calculate ideally what the prices of these four options should be, using the daily volatility version of our options pricing calculator. This is not as hard as it seems. Once you have the formula determined (well, one for a put, one for a call), then you apply it over and over in basically a cut and paste operation. Once you have this master set up, then you should be able to quickly evaluate the sensitivity of any iron condor that you care to evaluate. You can check your calculations by comparing them to the first sheet using the IDV shown there. When you plug in .00598 for the long call, for example, it should yield an option price of $0.35. Page 2 spread This is a version of my Iron Condor Sensitivity Calculator which you will not use in this homework except for reference. This version uses the iterative technique discussed in class to calculate the Implied Daily Volatility of these four options given the actual prices of the stock and the four options and the strike prices at a moment on April 18, 2012. Because we are selling a strangle near the money and buying a more distant strangle for a hedge, this 4-way transaction is net cash positive ($1.74 per share). The Sensitivity section allows you to override volatility or stock price and calculate time decay in any desired combination. Page 1 spread This is the (less useful) version of the iron condor net spread calculator that you are being asked to complete for the homework. Instead of using existing options prices to calculate IDV, in this easier example you are asked to provide the historical IDV to calculate ideally what the prices of these four options should be, using the daily volatility version of our options pricing calculator. This is not as hard as it seems. Once you have the formula determined (well, one for a put, one for a call), then you apply it over and over in basically a cut and paste operation. Once you have this master set up, then you should be able to quickly evaluate the sensitivity of any iron condor that you care to evaluate. You can check your calculations by comparing them to the first sheet using the IDV shown there. When you plug in .00598 for the long call, for example, it should yield an option price of $0.35. Page 2 spread The HW objective and its relationship to the take-home final Using the student assignment version of the spread (the Page 2 spread in this slide show - the version where you use historical daily volatility rather than calculate implied daily volatility from actual prices) take the following steps: Using the Historical IDV provided, 0.00785 and the other defaults, such as 31 DTM, calculate the price of each of the four options, the cash spread on each side, and the cash net for the option writer. Hint: Look at the other version (Page 1 spread) that used real data to figure out how to calculate spread and net, then use one of two of those IDVs to check your math to make sure your calculator is working. Then design the sensitivity section to evaluate the sensitivity of specifically two variables: An increase in volatility of 0.0010 (which will cause a loss) in isolation. Three days of time decay in isolation. A change in the stock price to 134.50 in combination with the other two. The take-home exam will ask you the answers to specifically these questions above and also ask you to change the Historical Volatility to another value and do different estimates for sensitivity. This is a version of my Iron Condor Sensitivity Calculator which you will not use in this homework except for reference. This version uses the iterative technique discussed in class to calculate the Implied Daily Volatility of these four options given the actual prices of the stock and the four options and the strike prices at a moment on April 18, 2012. Because we are selling a strangle near the money and buying a more distant strangle for a hedge, this 4-way transaction is net cash positive ($1.74 per share). The Sensitivity section allows you to override volatility or stock price and calculate time decay in any desired combination. Page 1 spread The HW objective and its relationship to the take-home final Using the student assignment version of the spread (the Page 2 spread in this slide show - the version where you use historical daily volatility rather than calculate implied daily volatility from actual prices) take the following steps: Using the Historical IDV provided, 0.00785 and the other defaults, such as 31 DTM, calculate the price of each of the four options, the cash spread on each side, and the cash net for the option writer. Hint: Look at the other version (Page 1 spread) that used real data to figure out how to calculate spread and net, then use one of two of those IDVs to check your math to make sure your calculator is working. Then design the sensitivity section to evaluate the sensitivity of specifically two variables: An increase in volatility of 0.0010 (which will cause a loss) in isolation. Three days of time decay in isolation. A change in the stock price to 134.50 in combination with the other two. The take-home exam will ask you the answers to specifically these questions above and also ask you to change the Historical Volatility to another value and do different estimates for sensitivity.