| 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.
