Strategies

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Buying SPX Straddles

 

SPX is above 1441.50 or below 1358.50 at expiration
 

Buy 1 SPX 1400 Straddle at $41.50 Debit

 
If the SPX index exercise settlement value is above the upside break-even point of 1441.50 at expiration, at 1470 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:

1470 (settlement value) – $1400 (call strike price) = $70 x $100 = $7,000

On the other hand, if SPX settles below the downside break-even point of 1358.50 at expiration, at 1330 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:

$1400 (put strike price) – 1330 (settlement value) = $70 x $100 = $7,000

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

  $7,000  settlement amount received for call or put
- $4,150  total debit initially paid for straddle
  $2,850   profit

The investor’s prediction of at least a 5% move in SPX index up or down (from 1400 to either 1470 or 1330) has proven true. The upside or downside profit of $2,850 represents a return on an initial investment of $4,150 premium paid for the straddle of approximately 68.7% over the 1-month life of the straddle.

 
 

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