Dazed and Confused

EDZ87 +264

Strike***Puts***Calls
92.50****-----*** +45
92.00****----****-56
91.50****-25***+172
91.00****-05****+45
90.50****-25****+223
90.00***+102****-25
89.50****-54****+35
89.00****+75-----****


Take a look at the position.
What can we tell about the position with puts and call netted?
If the market is at 91.00 and the market moves up to 91.50,
the position at the 91.50 strike would look like that at the 91.00 strike when the market is at 91.00. And the 92.00 strike options would "look" like the 91.50 do at market price 91.00.
So the corresponding position would now look just like the following if the market moved to 91.50:


EDZ87 +264
Shifted
Strike***Net
(92.00)****+45
(91.50)****-56
(91.00)****+147
(90.50)****+35
(90.00)****+198
(89.50)****+77
(89.00)****-19
(88.50)****+75


So in a 50 tick higher move, we'd make some from a parallel shift in volatility. But, as the options at the 90 strike becomes more intrinsic (in the money) than time premium (that which is abive and beyond the strike, we get hurt on steady or lower volatility from the +147 long premium at the (not shifted) 91.50 strike.

The point is that because time premium collapses "at the money", a trader wants to "butterfly" the position such that the position is short the premium near the at the money strike price. The long +198 90.50 premium does not help the trader because the options "converge" to their intrinsic value.

And the trader can ballpark what would happen if the market moved 50 ticks the opposite way without any computer analysis. Now the shifted strike position looks like this:

EDZ87 +264
Shifted
Strike***Net
(93.00)****+45
(92.50)**** -56
(92.00)****+147
(91.50)****+35
(91.00)****+198
(90.50)****+77
(90.00)****-19
(89.50)****+75

OOPS! Again we get hurt from long premium at the market shifts down 50 ticks. Now the +198 90.50 strike is at the money. We get killed there if vol is hurt.

Traders want to sell straddles AT THE MONEY!!

Of course, if we have a RADICAL move to the upside or downside,this entire potion becomes one HUGE straddle. And as we all know, that event was highly unlikely, if not "impossible" before October 22, 1987! ;)