A Straddle is a
volatility strategy and is used when the stock price / index is expected to
show large movements. This strategy involves buying a call as well as put on
the same stock / index for the same maturity and strike price, to take
advantage of a movement in either direction, a soaring or plummeting value of
the stock / index. If the price of the stock / index increases, the call is
exercised while the put expires worthless and if the price of the stock / index
decreases, the put is exercised, the call expires worthless.
Market
Scenario: Volatile
Risk: Limited
(Net Premium Paid)
Reward: Unlimited
BEP:
Upper Break-even Point
= Strike Price of Long Call + Net Premium Paid
Lower Break-even
Point = Strike Price of Long Put - Net Premium Paid
EXAMPLE:
Entry:
SPOT
|
5100
|
STRIKE
|
PREMIUM
| |
BUY CALL
|
5000
|
137
|
BUY PUT
|
5000
|
70
|
UPPER
BEP: 5000 + 207 = 5207 LOWER
BEP: 5000 – 207 = 4793
On Exit if:
SPOT
|
CALL PAY-OFF
|
PUT PAY-OFF
|
STRATEGY PAY-OFF
|
4600
|
-137
|
330
|
193
|
4700
|
-137
|
230
|
93
|
4793
|
-137
|
137
|
0
|
4800
|
-137
|
130
|
-7
|
4900
|
-137
|
30
|
-107
|
5000
|
-137
|
-70
|
-207
|
5100
|
-37
|
-70
|
-107
|
5200
|
63
|
-70
|
-7
|
5207
|
70
|
-70
|
0
|
5300
|
163
|
-70
|
93
|
5400
|
263
|
-70
|
193
|
Long
Straddle - Strategy Pay-Off
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