A New Approach to Build a Successful Straddle Strategy: The Analytical Option Navigator

Orkhan Rustamov, Fuzuli Aliyev (), Richard Ajayi and Elchin Suleymanov ()
Additional contact information
Orkhan Rustamov: International Magistrate and Doctorate Center, Azerbaijan State University of Economics, Baku AZ1001, Azerbaijan
Fuzuli Aliyev: School of Business, ADA University, Aghaoghlu str. 11, Baku AZ1008, Azerbaijan
Richard Ajayi: College of Business, University of Central Florida, Orlando, FL 32816, USA

Risks, 2024, vol. 12, issue 7, 1-17

Abstract: The study described in this paper develops a new technique which permits the execution of an open straddle strategy based on the superior volatility forecast for analyzing historical data. We extend the current litearure by measuring the volatility of an underlying asset in the last predefined period and comparing the actual volatility in currency with historical volatility in currency to make predictions of implied volatility. We calculated stock price volatility through an optimal holding period (OHP) and set up bars of volatility in currency. To obtain this, we solved optimization equations to find maximum and minimum movements in the volatility in currency within the defined range. We placed volatility in currency into percentile rankings and designed a straddle trading strategy based on the last OHP’s volatility in currency. The technique allows for an investor (or trader) to open either short or long positions based on calculations for a selected OHP’s volatility in currency. We applied this strategy to 130 stocks which are traded on CBOE. We developed a trading algorithm which can be used by institutional as well as individual investors. The algorithm is set to determine historical volatility in currency and forecast upcoming volatilities in currency through the understanding of the market sentiment. The empirical findings show that the stocks analyzed with the algorithm generate positive returns along a spectrum of changing volatilities of the underlying assets.

Keywords: option strategies; bar; straddle; volatility; algorithm (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/2227-9091/12/7/113/pdf (application/pdf)
https://www.mdpi.com/2227-9091/12/7/113/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:12:y:2024:i:7:p:113-:d:1437901

Access Statistics for this article

Risks is currently edited by Mr. Claude Zhang

More articles in Risks from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().