Options Strategies

Strategy Number 9 – Short "Straddle"

 


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:

 1


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"577Strategy Number 9 – Short "Straddle"