A long straddle is a straddle whereby two options (a call and a put) are simultaneously purchased on the same underlying stock, index, interest rate, or any other underlying, for the same strike price.
The breakeven point for a long straddle is the situation where the long options involved don’t result in profits or losses. Rather the amounts paid to establish the position will be equal to the amounts attained from it. A long straddle has two breakeven points: one for the call leg and one for the put leg. The breakeven point for the call leg of the straddle can be calculated using the following formula:
Breakeven = call strike price + total premium
The following example illustrates this:
Long 1 XYZ April 60 Call at 5
Long 1 XYZ April 60 Put at 4
Breakeven = 60 + (5+4) = $69
The investor will breakeven if the underlying stock price increases to $69 at expiration.
On the other hand, the breakeven point for the put leg of the straddle is given by:
Breakeven = put strike price – total premium
Breakeven = 60 – (5+4) = $51
The investor will breakeven if the underlying stock price drops to $51 at expiration.
Overall, if the stock price exceeded $69 or fell below $51, the position would begin to make money (it would become profitable, and the more the underlying stock moves beyond these point, the more profitable it becomes).
Comments