Close Above/Below Break-Even Points

Index XYZ is above 103.20 or below 96.80 at expiration


Buy 1 XYZ 100 Call at $1.70
Buy 1 XYZ 100 Put at $1.50


If index XYZ closes above the upside break-even point of 103.20 at expiration, at 105 for instance, the put will expire out-of-the-money and worthless. The call will be in-the-money and worth its intrinsic value, or its cash settlement amount (difference between the strike price and index level):

105 XYZ index level
-$100 call strike price
$5 intrinsic value (cash settlement amount)

On the other hand, if index XYZ closes below the downside break-even point of 96.80 at expiration, at 95 for instance, the call will expire out-of-the-money and worthless. The put will be in-the-money and worth its intrinsic value, or its cash settlement amount (difference between the strike price and index level):

$100 put strike price
-95 XYZ index level
$5 intrinsic value (cash settlement amount)

In either instance, if you sell the XYZ 100 call or put for its intrinsic value of $5, or exercise either in-the-money option and receive its cash settlement amount, then you would see a profit:

$5.00 intrinsic value or cash settlement amount for call or put
-$3.20 total premium initially paid for straddle
$1.80 profit

The investor’s prediction of at least a 5% move in XYZ index up or down (from 100 to either 105 or 95) has proven true. The upside or downside profit of $1.80 ($180 total) represents a return on an initial investment of $3.20 premium paid for the call ($320 total) of approximately 56.3% over the 1-month life of the straddle.


Previous Next
  VIX Snapshot

*Third Party Advertisement