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
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.