Buying OEX Straddles

 

OEX is above 617.10 or below 582.90 at expiration


Buy 1 OEX 600 Straddle at $17.10 Debit


If the OEX index exercise settlement value is above the upside break-even point of 617.10 at expiration, at 630 for instance, the put will expire out-of-the-money and worthless.

The call will be in-the-money and worth its cash settlement amount:

630 (settlement value) – $600 (call strike price) = $30 x $100 = $3,000

On the other hand, if OEX settles below the downside break-even point of 582.90 at expiration, at 530 for instance, the call will expire out-of-the-money and worthless. The put will be in-the-money and worth its cash settlement amount:

$600 (put strike price) – 530 (settlement value) = $30 x $100 = $3,000


In either instance, if you exercise either in-the-money option and receive its cash settlement amount, you would then see a profit:

  $3,000  settlement amount received for call or put
- $1,710  total debit initially paid for straddle
  $1,290   profit

The investor’s prediction of at least a 5% move in OEX index up or down (from 600 to either 670 or 530) has proven true. The upside or downside profit of $1,290 represents a return on an initial investment of $1,710 premium paid for the straddle of approximately 75.4% over the 1-month life of the straddle.

 
 

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