Simple Straddle Pricing

This is a simple blog post that utilizes python to calculate the expected value of a straddle during earnings. In this case, it’s going to be a short straddle on Morgan Stanley (NYSE: MS). MS earnings is before market open on July 15th, 2021. Looking at the option chain, the front option chain (4 dte) shows an at the money implied volatility of approximately 40%.

MS ATM Implied Volatility

Estimated event volatility can be calculated by using some of the back expiration dates implied volatility. For example, the chain that expires in 18 days has a ATM implied volatility of 29%.

18 DTE ATM Implied Volatility

With this information, we can calculate an expected value if we were to leverage a short straddle and the implied volatility follows what the market implies. Below is some simple python code that I use in Jupyter Notebook to enter values.

import mibian
#MS ul and strike based on options chain.
 ul_price = 92.75
 strike_price = 92
 interest_rate = .75
 days_to_expiry = 4
 volatility = 43
 calculate call and put pricing
 pre_earnings = mibian.BS([ul_price, strike_price, interest_rate, days_to_expiry], volatility = 43.00)
 post_earnings = mibian.BS([ul_price, strike_price, interest_rate, days_to_expiry], volatility = 29.00)
 pre_straddle = pre_earnings.callPrice + pre_earnings.putPrice
 post_straddle = post_earnings.callPrice + post_earnings.putPrice
 print("Straddle price: {}".format(pre_straddle))
 print("Straddle price expected with iv crush is: {}".format(post_straddle))
 diff = pre_straddle - post_straddle
 print("difference in straddle price: {}".format(diff))

The screen shot below is just the resulting printing of the code above, the straddle price in Think or Swim matches what the code produces as well.

Straddle Expected Value

I hope you’ve enjoyed this extremely short post, It’s something I use quite a bit on earnings. I hope it’s useful. I’ll post more in-depth code and concepts later on. Happy trading!

If you find this helpful subscribe or buy some swag or check out the rest of the site.