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Long Straddle

  • Posted by Trading Campus
  • Date December 27, 2017
  • Comments 104 comments

Long Straddle option trading strategy example

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.

At-the-Money call and put options are bought in a straddle to reap the benefits immediately. A Straddle is a volatility strategy and is used when the stock price / index is expected to show large movements. It can be on either side i.e. a stock may rise or fall.

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.

With Straddles, the investor is direction neutral. All that he is looking out for is the stock / index to break out exponentially in either direction.

Example:

Infosys results are expected to come today. This time the expectation is that, if the results are good the stock will make new highs or if the results are bad, the stock will plummet. I don’t want to miss this opportunity and want to be directionless.

Current Market Price of Infosys is 940. So I will buy one call option of 940 strike at 15 rupees and one put option of 940 strike at 10 rupees. This is because we buy At-the-Money options in a straddle. So, if the results are announced and the stock moves in either direction, I will be able to reap the benefits.

If the results are good and the stock moves up, the call option will give me profit and I’ll let go the put option expire worthless. Premium paid for the put option is my loss in this case. If the situation is such that the results are bad and the stock falls, the put option will give me profits and I’ll let go the call option expire worthless. Premium paid for the call option is my loss in this case.

Infosys Call and put

Option Strike (K)

Infosys

at expiry

Put Payoff

Max((K-S),0)

Call Payoff

Max((S-K),0)

Net Payoff
940 890 940-890-10=40 -15 40-15=25
940 900 940-900-10=30 -15 30-15=15
940 910 940-910-10=20 -15 20-15=5
940 920 940-920-10=10 -15 10-15=-5
940 930 940-930-10=0 -15 0-15=-15
940 940 940-940-10=-10 -15 -10-15=-25
940 950 -10 950-940-15=-5 -10-5=-15
940 960 -10 960-940-15=5 -10+5=-5
940 970 -10 970-940-15=15 -10+15=5
940 980 -10 980-940-15=25 -10+25=15
940 990 -10 990-940-15=35 -10+35=25

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Previous post

Bear Put Spread
December 27, 2017

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Short Straddle
December 27, 2017

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Bajaj Electricals Limited is engaged in engineering and projects; power distribution, illumination and consumer durables businesses.

It has a range of domestic and kitchen appliances comprising water heaters, room heaters, coolers, irons, mixers, induction cookers, toasters, kettles, microwave, rice cookers, gas stoves, non-electrical kitchen aids and pressure cookers.

It offers ceiling, table, pedestal, wall, fresh air and industrial fans, and lighting solutions, such as light sources, light emitting diode-based lighting products, domestic luminaires, torches and lanterns.

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The Company's business segments consist of

  1. Lighting;
  2. Consumer Durables;
  3. Engineering & Projects,

The Lighting segment includes lamps, tubes and luminaries.

The Consumer Durables segment includes appliances and fans.

The Engineering & Projects segment includes transmission line towers, telecommunications towers, highmast, poles and special projects.

The Others segment includes diecasting and wind energy.

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