Approximating the Straddle Price

Quantitative Finance Level 2

Based on a 256-trading day calendar, what is the approximate straddle price for an ATM straddle at the $80 strike expiring in 20 trading days with a volatility of 10%?


The answer is 1.7888.

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Calvin Lin by Calvin Lin

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1 solution

Calvin Lin Staff
Feb 10, 2015

Using the straddle approximation formula, the answer is

1 2000 × 80 × 10 × 20 = 1.789 \frac{ 1}{ 2000} \times 80 \times 10 \times \sqrt{20} = 1.789

The price seems low, and that is due to the low volatility and time to expiration.

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