Thread by @krishstocks

#Straddle Explained

This #strategy involves two options of same strikes price & same expiry, A long straddle is created by buying a call and a put of same strike & same expiry whereas a short straddle is created by shorting a call & put option of same strike & same expiry

1/n

Let us say a #stock is trading at Rs 6,000 and premiums for ATM call and put options are 257 and 136 respectively.
Long #Straddle
If you buys both a call & a put at these prices, then his maximum loss will be equal to the sum of these two premiums paid, which is equal to 393

2/n

And, price movement from here in either direction would first result in that person recovering his premium and then making profit. This position is undertaken when trader’s view on price of the underlying is uncertain but he thinks that in whatever direction the market moves

3/n

let us analyze position on various market moves. Let us say the stock falls to 5300 at expiry. Then, your pay offs from position would be:
Long Call: - 257 (market price is below strike price, so option expires worthless) LongPut: -136-5300+6000=564
Net Flow: 564 – 257 = 307

4/n

As the stock price keeps moving down, loss on long call position is limited to premium paid, whereas profit on long put position keeps increasing.
Now, consider that the stock price shoots up to 6700.
Long Call: -257 – 6000+6700 = 443 Long Put: -136
Net Flow: 443 – 136 = 307

5/n

As the #stock price keeps moving up, loss on long put position is limited to premium paid, whereas profit on long call position keeps increasing.
Thus, it can be seen that for huge swings in either direction the strategy yields profits.

6/n

However, there would be a band within which the position would result into losses. This position would have two Break even points (BEPs) and they would lie at “Strike – Total Premium” and “Strike + Total Premium”. Combined pay-off may be shown as follows:

It may be noted from the table and picture, that maximum loss of Rs. 393 would occur to the trader if underlying expires at strike of option viz. 6000. Further, as long as underlying expires between 6393 and 5607,

8/n

you would always incur the loss and that would depend on the level of underlying. your profit would start only after recovery of your total premium of Rs. 393 in either direction and that is the reason there are two breakeven points in this strategy.

9/n

#ShortStraddle

it would be the exact opposite of long #straddle. Here, trader’s view is that the price of underlying would not move or remain stable. So, you sells a call and a put so that he can profit from the premium. As position of short straddle is just opposite of long

It should be clear that this strategy is limited profit and unlimited loss strategy and should be undertaken with significant care. Further, it would incur the loss for trader if market moves significantly in either direction – up or down.

11/n

#OptionsTrading #Optionselling