Straddles and Strangles Part 1
Let's assume implied volatility is too high. While there are many ways to trade this, the two simplest are to sell either a straddle or a strangle. Here we are going to compare there two strategies. It is easy to work out the expected profit of an option position. It is just the position value at the volatility we sold at, minus the position value evaluated at the realized volatility. But obviously this doesn't tell the whole story. When selling options our upside is capped by the collected premium, but our downside is infinite. This means that all short option positions will have significant negative skew.