SPX is between 1441.50 and 1358.50 at expiration
| Buy 1 SPX 1400 Straddle at $41.50 Debit
With the exercise settlement value of the SPX index exactly at the strike price of $1400 at expiration, both the 1400 call and the 1400 put would expire at-the-money and with no value. The maximum, predetermined loss of the $4,150 debit paid would be realized.
At expiration, with SPX exercise settlement value at either the upside break-even point of 1441.50, or the downside break-even point of 1358.50, the call’s or put’s cash settlement amount would be equal to the initial debit paid for the straddle.
1425 (settlement value) – $1400 (call strike price) = $25 x $100 = $2,500
With SPX settling at expiration between 1441.50 and 1358.50, but not at the $1400 strike price, one of the options would expire in-the-money and have intrinsic value, with the other expiring worthless. In this case, the in-the-money option could be exercised to recoup some of the original straddle purchase price resulting in a partial loss for the position.
For example, the SPX index exercise settlement value is 1425 at expiration. The 1400 put would expire out-of-the-money and with no value, and the 1400 call would have a cash settlement amount of:
The level of SPX did change over one month, but not as much as anticipated. The straddle that cost $41.50 is now worth only the intrinsic value of its in-the-money call, or $25. The investor could exercise the call and recoup some of the straddle’s initial purchase price. If the SPX 1400 call is exercised for cash settlement amount $2,500 then the loss for the position would be:
$4,150 debit initially paid for straddle
– $2,500 settlement amount received at call’s exercise
$1,650 partial loss