Between Break-Even Points

OEX is between 617.10 and 582.90 at expiration

Buy 1 OEX 600 Straddle at $17.10 Debit

With the exercise settlement value of the OEX index exactly at the strike price of $600 at expiration, both the 600 call and the 600 put would expire at-the-money and with no value. The maximum, predetermined loss of the $1,710 debit paid would be realized.

At expiration, with OEX exercise settlement value at either the upside break-even point of 617.10, or the downside break-even point of 582.90, the call’s or put’s cash settlement amount would be equal to the initial debit paid for the straddle.

With OEX settling at expiration between 617.10 and 582.90, but not at the $600 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 OEX index exercise settlement value is 610 at expiration. The 600 put would expire out-of-the-money and with no value, and the 600 call would have a cash settlement amount of:

610 (settlement value) – $600 (call strike price) = $10 x $100 = $1,000

The level of OEX did change over one month, but not as much as anticipated. The straddle that cost $17.10 is now worth only the intrinsic value of its in-the-money call, or $10. The investor could exercise the call and recoup some of the straddle’s initial purchase price. If the OEX 600 call is exercised for cash settlement amount $1,000 then the loss for the position would be:

$1,710 debit initially paid for straddle
$1,000 settlement amount received at call’s exercise
$710 partial loss

Previous Next