Straddle Strangle Swaps

To the right is a fun little trade called the Straddle Strangle Swap. Look familiar? It looks a lot like a simple calendar spread or a butterfly spread. In actuality it is both, making it what I consider a sort of super calendar spread. Now lets take a look at how to construct these and what qualities make them so super.

Straddle Strangle Swaps are a specific type of Double Diagonal. They involve selling a front month straddle and buying a back month strangle. In our WAG trade pictured we sold the June 35 strike put and call and bought the July 40 call and 30 put. As you can see it provides positive Theta, and in this case negative Vega. (Using a longer calendar spread such as June/Sept would provide positive Vega). Straddle Strangle swaps are typically delta neutral but this will depend on the strike of the straddle. Like a calendar spread it will have negative delta as the market heads above the strike and will have positive delta when the market heads below the strike. So with all these similarities to calendar spreads what makes it so super?

Looking at the June/July 35 Calendar (image to the lower right) you can see that it is not as wide as the swap. Its break even points are 33.95 and 36.16 vs 33.20 and 36.72. This gives the Straddle Strangle Swap a 1.31 of additional width. (Using a longer dated calendar spread such as Oct/June would widen the calendar significantly but would still not be as wide as the swap). The calendar has positive Vega but has only half the Theta of the swap.

Another good thing about the Straddle Strangle Swap trade is that it is executed for a credit rather than a debit. This allows you to earn interest on the credit plus the buying power it utilizes. With today’s low interest rates it doesn’t amount to much. However, if you use margin in your account this can be a good way to save a lot of money from margin costs since you will be using your own cash rather than your brokers.

Last but not least one should take note of commissions implications. If you pay commission on a per-contract basis the swap is significantly cheaper, requiring only 4 contracts. The calendar requires 12 contracts to utilize equivalent buying power which means about 3x the commissions. However, if you are charged by the number of legs in the trade, like many brokers do, the calendar spread option is half the cost of the swap. Of course you should never let the commission tail wag the dog but the commissions implications are certainly worth paying attention to. All other things being equal, commissions may be the margin upon which you choose one over the other.

Stay tuned for more on Double Diagonals such as the Straddle Strangle Swap.

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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More


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