Market dATA
DJ Index	100 points
Prices
Call 100	$1,000
Put 100	$1,500

Strategy name:

Short “Straddle”.

 

Recommended use of strategy

Expectation of steady DJ Index

 

Strategy components

Writing a Short Call and writing a Short Put at an identical strike price (The strike price of the Call option and the Put option should preferably be close to the current DJ Index).

Example: Write Short Call 100 at a price of $1,000 and write a Short Put at a price of $1,500.

 

Expenses / income from building the strategy

Income of $2,500.

 

Strategy graph:

 

Auxiliary table for building the profit line

 

DJ Index (Horizontal axis)	(Fixed expenses)/ fixed income	Variable income (Call contribution)	Variable income (Putl contribution)	Total profit / (loss)  (Vertical axis) 2+3+4
1	2	3	4	5
50	$2,500	—	($5,000)	($2,500)
60	$2,500	—	($4,000)	($1,500)
70	$2,500	—	($3,000)	($500)
80	$2,500	—	($2,000)	$500
90	$2,500	—	($1,000)	$1,500
100	$2,500	—	—	$2,500
110	$2,500	($1,000)	—	$1,500
120	$2,500	($2,000)	—	$500
130	$2,500	($3,000)	—	($500)
140	$2,500	($4,000)	—	($1,500)
150	$2,500	($5,000)	—	($2,500)

Strategy analysis:

Source of loss

We lose on a change in the index:

• When the index goes up we lose on the Short Call we have written.
• When the index goes down we lose on the Short Put option we have written.

 

Source of profit        

Income from building the strategy. The profit is at a maximum if the DJ Index remains steady. The profit is limited to no more than the amount received for writing the options.

 

Break-even point     

When the loss from the Call option or from the Put option equals the income from writing the options totaling $2,500. This occurs when the index is at 125 points or 75 points.