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.

Speculating With a Straddle

Example:              Stock is trading at $55 

Outlook:               You anticipate a big move either up or down over the next 10 days.

Possible strategy:  Long Straddle                                

                               Buy one 55 strike call at $3.10

                               Buy one 55 strike put at  $3.05

                                                   Net Debit  $6.15 ($615.00)

 

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

Stock

Long 55 Call

Profit/(Loss)

Long 55 Put

Profit/(Loss)

Net Profit

(Loss)

45

($3.10)

$6.95

$3.85

50

($3.10)

 $1.95

($1.15)

55

($3.10)

($3.05)

($6.15)

60

    $1.90   

($3.05)

($1.15)

65

$6.90

($3.05)

$3.85

 

 

At Expiration:

  • Upside Breakeven = Strike Price + Net Debit
  • Upside Breakeven = $61.15
  • Downside Breakeven = Strike Price - Net Debit
  • Downside Breakeven = $48.85
  • Maximum Loss = Net Debit
  • Maximum Loss = $615   

In Summary: Substantial profit is possible with a big move up or down in the stock. Also an increase in volatility would be favorable.  Volatility up, both call and put premiums up. Volatility only affects time premium.  But keep in mind you are buying all time premium which will decay over time and at an accelerated pace as expiration approaches.

  VIX Snapshot

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