Options Strategies

Strategy Number 9 – Short "Straddle"

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

Strategy name:

Recommended use of strategy

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.

Strategy Number 9 – Short "Straddle"534