Sizing Up the Straddle

A biotech stock trades at $80 \$80 with implied volatility of 25% 25\% . Ignoring interest rates and dividends, roughly what should a one-year at-the-money straddle — one call plus one put, both struck at $80 \$80 — cost? Give the trader's back-of-envelope estimate and where it comes from.

Answer

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