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Options Strategies
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Long Straddle
| Strategies |
Long Straddle |
| Component |
Buy call, buy put of the same strike price/level and month |
| Potential Profit |
- When the stock price/index level is below the lower break-even point, substantial and equals to lower break-even point minus stock price/index level
- When stock price/index level is above the upper break-even point, unlimited and equals to stock price/index level minus upper break-even point
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| Maximum Loss |
Total premium paid
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| Time Value Impact |
Negative |
| Break-even |
- The lower break-even point equals to strike price/level minus total premium paid
- The upper break-even point equals to strike price/level plus total premium paid
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| Remarks |
Compared with Short Butterfly which has limited profits, Long Straddle has substantial profit on the downside and unlimited profit on the upside. Compared with Long Strangle, Long Straddle is more expensive to establish but requires less market volatility to be profitable. |
Example
| Component |
Buy ABC Jul $200 Put, pay $15, and buy ABC Jul $200 Call, pay $10 |
| Net Premium |
Pay $10+$15=$25 |
| Break-even |
- Lower: $200-$25=$175
- Upper: $200+$25=$225
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| Profit when |
Stock price is below $175 or above $225 |
| Potential Profit |
- When the stock price is below $175, $175 - stock price
- When the stock price is above $225, stock price - $225
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| Potential Loss |
$25 |
| Time Value Impact |
Negative |
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