Strategies

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Weekly Strategy Discussion

The Weekly Strategy Discussion is designed to assist individuals in learning how options work and in understanding various options strategies. Options involve risk and are not suitable for all investors. The strategies discussed are for educational and illustrative purposes only, and should not be construed as an endorsement, recommendation or solicitation to buy or sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.

Long Straddle

Example:                 XYZ stock is trading at $50 

Outlook:                  You anticipate a big move either up or down over the next six weeks with a possible increase in volatility.

Possible strategy:    Buy the Straddle                                

                             Buy one 50 strike call at $3.20

                             Buy one 50 strike put at  $3.00

                                                 Net Debit  $620 ($620.00)

*All values shown are at the time of expiration. Commissions and other trading fees not included.

Stock

Long 50 Call
Profit/(Loss)

Long 50 Put
Profit/(Loss)

Net Profit
(Loss)

60

$6.80

($3.00)

$3.80

55

$1.80

($3.00)

($1.20)

50

($3.20)

($3.00)

($6.20)

45

($3.20)

$2.00

($1.20)

40

($3.20)

$7.00

$3.80

 

 

At Expiration:

  • Upside Breakeven = Strike Price + Net Debit
  • Upside Breakeven = $56.20
  • Downside Breakeven = Strike Price - Net Debit
  • Downside Breakeven = $43.80
  • Maximum Loss = Net Debit
  • Maximum Loss = $620   

In Summary: Substantial profit is possible with a big move in XYZ stock over the next 6 weeks or a major increase in volatility.  Be aware that this position has exposure to time decay and may react positively or negatively to changes in volatility.