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    Options Strat9 en

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    Corey Wu
    A long straddle involves buying a call and put option with the same strike price and expiration date on an underlying asset. This establishes upper and lower break-even points where the position becomes profitable if the asset price rises above or falls below those points. An investor executed a long straddle on DEF stock, buying 10 calls for $3.70 each and 10 puts for $4.10 each, for a total debit of $7.80. The lower break-even point was $22.70 and upper was $37.80, meaning the trade would be profitable if DEF moved outside that range.

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    Options Strat9 en

    Uploaded by

    Corey Wu
    40 views2 pages
    A long straddle involves buying a call and put option with the same strike price and expiration date on an underlying asset. This establishes upper and lower break-even points where the position becomes profitable if the asset price rises above or falls below those points. An investor executed a long straddle on DEF stock, buying 10 calls for $3.70 each and 10 puts for $4.10 each, for a total debit of $7.80. The lower break-even point was $22.70 and upper was $37.80, meaning the trade would be profitable if DEF moved outside that range.

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    options strat 9

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    Options Strat9 En

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    A long straddle involves buying a call and put option with the same strike price and expiration date on an underlying asset. This establishes upper and lower break-even points where the position becomes profitable if the asset price rises above or falls below those points. An investor executed a long straddle on DEF stock, buying 10 calls for $3.70 each and 10 puts for $4.10 each, for a total debit of $7.80. The lower break-even point was $22.70 and upper was $37.80, meaning the trade would be profitable if DEF moved outside that range.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    40 views2 pages

    Options Strat9 en

    Uploaded by

    Corey Wu
    A long straddle involves buying a call and put option with the same strike price and expiration date on an underlying asset. This establishes upper and lower break-even points where the position becomes profitable if the asset price rises above or falls below those points. An investor executed a long straddle on DEF stock, buying 10 calls for $3.70 each and 10 puts for $4.10 each, for a total debit of $7.80. The lower break-even point was $22.70 and upper was $37.80, meaning the trade would be profitable if DEF moved outside that range.

    Copyright:

    © All Rights Reserved
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    A long straddle consists of taking a long position in both a call option and a put option on the same asset

    with
    the same strike price and expiry date. By doing so, the investor sets lower and upper break-even points for his
    position. This strategy is useful when an event will have either a highly favourable or unfavourable impact on
    the price of the underlying asset, but the investor is unsure of the direction. The long straddle holder expects
    that the future price fluctuation of the underlying stock will be greater than the cost of buying the options.
    OBJECTIVE
    To profit from future stock volatility when the market underestimates it.
    STRATEGY
    An investor feels that DEF options are undervalued and expects a large swing in the price of DEF following the
    expected release of earnings statement. DEF is trading at $29.35 a share.
    To profit from his outlook, he buys a straddle on DEF: purchase of 10 DEF JUL 30 call options and purchase of
    10 DEF JUL 30 put options. Calls are trading at $3.70, for an out-of-the-pocket cost of $3,700.00. Puts are
    worth $4.10, for an out-of-the-pocket cost of $4,100.00. His net out-of-the-pocket cost is $7,800.00
    ($3,700.00 + $4,100.00).
    Buy 10 DEF JUL 30 calls at $3.70
    Buy 10 DEF JUL 30 puts at $4.10
    Net debit: $7.80
    His lower break-even corresponds to the strike price minus the total option premium ($30.00 $7.80 = $22.70);
    his upper break-even point is the strike price plus the total option premium ($30.00 + $7.80 = $37.80).
    This means that the trade will be profitable as long as the price of the stock moves outside this threshold.
    RESULTS
    The downside risk of this strategy is known and limited. If the price of the stock remains inside the threshold,
    the investor may lose up to the total premium paid for the purchase of the options. Note that a straddle is
    doubly sensitive to the passage of time. Quite often, an investor will decide to cash in his profits if the price
    of the stock moves drastically even if a small amount of time has passed since he bought his straddle or if his
    position no longer reflects his initial intentions.
    Conversely, this strategy attains its full potential when the fluctuation in the price of the stock goes outside the
    preset limits. The investor can exercise either the call or the put (depending on the direction of prices) and trade
    his DEF shares on the stock market to cash in his profit, or sell the favourable option in the market.
    See other side >>

    S t ra te g y

    SITUATION
    Shrewd option traders execute transactions based on the volatility of the stock under option by buying a
    straddle. This trading strategy is primarily based on the price volatility of the underlying asset. The long straddle
    investor is said to be buying volatility.

    equity options

    Long straddle

    Profit

    Strike price

    Stock price

    0
    Loss

    Total option
    premium

    Break-even points
    [strike price total option premium]

    Strike price

    Profit

    A few words on the strangle


    The purchase of a straddle is normally executed with at-the-money strike prices. An investor can also purchase a
    combination with different strike prices through the purchase of a strangle. This strategy implies the purchase
    of out-of-the-money call and put options. As a result, the premium paid to execute a strangle is lower than the
    premium of a straddle. 0
    Stock price
    Total option

    Break-even points

    Loss
    Profit

    premium
    + establishes
    Like the straddle, a strangle
    lower and
    break-even
    points. The investor will start making
    [strike
    priceupper
    total
    option premium]
    profits when the price of the underlying stock is higher than the upper break-even point or lower than the
    break-even point on the downside.
    Strike prices
    Break-even points

    Loss

    Theoretically, the maximum


    risk is higher
    a strangle.
    The maximum loss is incurred when the price
    downside [strike
    price for
    total
    option premium]
    of the stock is between the
    lower
    and
    upper
    strike
    prices
    at
    expiry.
    In comparison, theStock
    maximum
    loss on a
    price
    0
    Total
    option
    straddle is incurred if the price of the
    stock
    at expiry is exactly equal to the strike price of the two options
    premiumis lower, the maximum loss of the investor is lower than the loss on
    bought. However, as the cost of a strangle
    a straddle.

    Break-even points
    [strike price total option premium]

    Profit

    Payoff diagram at expiry


    Long strangle

    Strike prices

    Stock price

    Loss

    Total option
    premium

    S t ra te g y

    equity options

    Payoff diagram at expiry


    Long straddle

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