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    Long Straddle - BUY CE & BUY PE at The Money - Same Strike Price & Same Expiry

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    ukumar_657611
    A long straddle involves buying a call and put option with the same strike price and expiration date. It profits if the stock price makes a large move in either direction. The maximum gain is unlimited while the maximum loss is limited to the premiums paid. For the position to break even, the stock needs to close above or below the strike by the amount of premiums paid. The strategy relies on an increase in volatility before time decay erodes the position value. It works best ahead of anticipated volatile events.

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    Long Straddle - BUY CE & BUY PE at The Money - Same Strike Price & Same Expiry

    Uploaded by

    ukumar_657611
    47 views3 pages
    A long straddle involves buying a call and put option with the same strike price and expiration date. It profits if the stock price makes a large move in either direction. The maximum gain is unlimited while the maximum loss is limited to the premiums paid. For the position to break even, the stock needs to close above or below the strike by the amount of premiums paid. The strategy relies on an increase in volatility before time decay erodes the position value. It works best ahead of anticipated volatile events.

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    Long Straddle

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    A long straddle involves buying a call and put option with the same strike price and expiration date. It profits if the stock price makes a large move in either direction. The maximum gain is unlimited while the maximum loss is limited to the premiums paid. For the position to break even, the stock needs to close above or below the strike by the amount of premiums paid. The strategy relies on an increase in volatility before time decay erodes the position value. It works best ahead of anticipated volatile events.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    47 views3 pages

    Long Straddle - BUY CE & BUY PE at The Money - Same Strike Price & Same Expiry

    Uploaded by

    ukumar_657611
    A long straddle involves buying a call and put option with the same strike price and expiration date. It profits if the stock price makes a large move in either direction. The maximum gain is unlimited while the maximum loss is limited to the premiums paid. For the position to break even, the stock needs to close above or below the strike by the amount of premiums paid. The strategy relies on an increase in volatility before time decay erodes the position value. It works best ahead of anticipated volatile events.

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    Long Straddle – BUY CE & BUY PE at the money - same strike

    price & same expiry

    A long straddle is a combination of buying a call and buying a put, at the money or as close as possible ,
    both with the same strike price and expiration. Together, they produce a position that should profit if
    the stock makes a big move either up or down.

    CE Buy benefit from an upward move .


    PE buy benefit from a downward move.
    both of these components cancel out small moves in either direction

    Typically, investors buy the straddle because they predict a big price move in the stock price, in either
    direction, during the life of the options.  and/or a great deal of volatility in the near future. 

    Ex-

    Buy XYZ 60 CE
    Buy XYZ 60 PE

    Profit/Loss

    Maximum Gain : Unlimited


    Maximum Loss : Premium Paid

    A long straddle assumes that the call and put options both have the same strike price.

    If at expiration the stock's price is exactly at-the-money, both options will expire worthless, and the
    entire premium paid to put on the position will be lost

    The profit at expiration will be the difference between the stock's price and the strike price, less the
    premium paid for both options. 
    straddle requires premiums to be paid on two types of options instead of one, the combined expense
    sets a relatively high hurdle for the strategy to break even.

    Breakeven

    This strategy breaks even if, at expiration, the stock price is either above or below the strike price by the
    amount of premium paid.  At either of those levels, one option's intrinsic value will equal the premium
    paid for both options while the other option will be expiring worthless

    Upside breakeven = strike + combined premiums paid


    Downside breakeven = strike - combined premiums paid

    Volatility

    Even if the stock held steady, if there were a quick rise in implied volatility, the value of both options
    would tend to rise. Conceivably that could allow the investor to close out the straddle for a profit well
    before expiration.

    Conversely, if implied volatility declines, so would both options' resale values

    Time Decay

    negative effect. Because this strategy consists of being long a call and a put, both of them at-the-money
    at least at the beginning, every day that passes without a move in the stock's price will cause the total
    premium of this position to suffer a significant erosion of value. What's more, the rate of time decay can
    be expected to accelerate toward the last weeks and days of the strategy, all other things being equal.

    Expiration Risk

    If the options are held into expiration, one of them may be subject to automatic exercise.
     exercise happens if, and only if, the option's intrinsic value exceeds an acceptable minimum.

    Comments

    race between time decay and volatility.

    The passage of time erodes the position's value a little bit every day, often at an accelerating rate. The
    hoped-for volatility increase might come at any moment or might never occur at all.
    Usage

    use a long straddle ahead of a news report, such as an earnings release, budget
    , the passage of a law, or the result of an election etc.

    capture the anticipated rise in implied volatility.


    run this strategy in the time period leading up to the event, say three weeks or
    more, but take profit a day or two before the event actually occurs. This method
    attempts to profit from the increasing demand for the options themselves, which
    increases the implied volatility component of the options themselves.

    increasing implied volatility increase the price of all options (puts and calls) at all
    strike prices.

    selecting options with expiration dates that are unlikely to be significantly affected
    by time decay ie low theta.

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