Investment Type: Debit
Strike Prices: ATM for both legs
Expiration Month: No Restriction
Composition: Buy Call + Buy Put

 
  Long Straddle Profile Chart  
 

 
Description:

 

Straddle is one of the most popular strategies in options trading. In straddle, we Buy Call and Buy Put at the same strike price and the same expiration date. We are able to make profit either when the stock price goes down or goes up. The main challenge here is that the strategy is expensive and it requires big movement of the stock, whether it’s up or down. Otherwise, we will not make money.

 

For this strategy, we are not interested on where the stock will go, but we are predicting that the stock will be volatile in short term (or long term). Use this strategy whenever an important announcement is expected and volatility is also expected to increase. We can also close on profitable leg first and leave the other leg open (we can make profit on the other leg too in case if the stock bounce back).

.

 
  Example  
 

 

Entry:


Maximum Initial Investment = $5,000 (or based on 5% money management rule)

 

Stock Price :
$34.00
   
Buy/Sell :
Buy
    
Strike Price :
35 Call
 } Premium: $0.80
Expiration Date :
December
No of Contracts :
20
    

 

Stock Price :
$34.00
   
Buy/Sell :
Buy
    
Strike Price :
35 Put
 } Premium: $1.70
Expiration Date :
December
No of Contracts :
20
    

 

Investment @ Entry = (Premium of Call Leg x No of Contracts x 100 Shares) + (Premium of Put Leg x No of Contracts x 100 Shares) = $1,600 + $3,400 = $5,000

 

Breakeven Point Down = Strike Price – Net Debit = $35.00 - $2.50 = $32.50
Breakeven Point Up = Strike Price + Net Debit = $35.00 + $2.50 = $37.50

 

Exit:

Best Case Scenario:

Stock Price :

 $42.50 up $8.50
   
Buy/Sell :
Buy
 } Premium: $7.50
Strike Price :
35 Call
Expiration Date :
December

 

Stock Price :

 $42.50 up $8.50
   
Buy/Sell :
Buy
 } Premium: $0.00
Strike Price :
35 Put
Expiration Date :
December

 

OR

 

Stock Price :

 $27.50 down $6.50
   
Buy/Sell :
Buy
 } Premium: $0.00
Strike Price :
35 Call
Expiration Date :
December

 

Stock Price :

 $27.50 down $6.50
   
Buy/Sell :
Buy
 } Premium: $7.50
Strike Price :
35 Put
Expiration Date :
December

 

Profit @ Exit = (Premium of Call Leg x No of Contracts x 100 Shares) + (Premium of Put Leg x No of Contracts x 100 Shares) – Investment @ Entry = $15,000 + $0 - $5,000 = $10,000


Return of Investment = Profit @ Exit / Investment @ Entry = 200%

 

OR

 

Profit @ Exit = (Premium of Call Leg x No of Contracts x 100 Shares) + (Premium of Put Leg x No of Contracts x 100 Shares) – Investment @ Entry = $0 + $15,000 - $5,000 = $10,000


Return of Investment = Profit @ Exit / Investment @ Entry = 200%

 

Worst Case Scenario : Investment @ Entry

 

Stock Price
Profit/Loss
ROI
27.50
10000
200%
30.00
5000

100%
32.50
0

0%
35.00
-5000

-100%
37.50
0

0%
40.00
5000

100%
42.50
10000
200%