Strategy Number 9 – Short “Straddle”

 

Market dATA
DJ Index100 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:

 1


Auxiliary table for building the profit line

 

DJ Index
(Horizontal axis)
(Fixed expenses)/ fixed incomeVariable income
(Call contribution)
Variable income
(Putl contribution)
Total profit / (loss) 
(Vertical axis)
2+3+4
12345
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.