Friday, September 28, 2012

Short Straddle (SELL CALL + SELL PUT of same strike)

Short Straddle (SELL CALL + SELL PUT of same strike)
A Short Straddle is the opposite of Long Straddle. It is a strategy to be adopted when the investor feels the market will not show much movement. He sells a Call and a Put on the same stock/index for the same maturity and strike price. It creates a net income for the investor. If the stock /index does not move much in either direction, the investor retains the Premium as neither the Call nor the Put will be exercised. However, incase the stock / index moves in either direction, up or down significantly, the investor’s losses can be significant. So this is a risky strategy and should be carefully adopted and only when the expected volatility in the market is limited.
Market Scenario: Less Volatile

Risk: Unlimited

Reward: Limited to the premium received

BEP:   Upper Breakeven Point = Strike Price of Short Call + Net Premium Received
Lower Breakeven Point = Strike Price of Short Put - Net Premium Received
EXAMPLE:
Entry:
SPOT
5100
   
                    

STRIKE
PREMIUM
SELL CALL
5000
122
SELL PUT
5000
85
UPPER BEP: 5000 + 207 = 5207                                          LOWER BEP: 5000 – 207 = 4793

On Exit if:
SPOT
CALL PAY-OFF
PUT PAY-OFF
STRATEGY PAY-OFF
4600
122
-315
-193
4700
122
-215
-93
4793
122
-122
0
4800
122
-115
7
4900
122
-15
107
5000
122
85
207
5100
22
85
107
5200
-78
85
7
5207
-85
85
0
5300
-178
85
-93
5400
-278
85
-193

Short Straddle - Strategy Pay-Off


Long Straddle (BUY CALL + BUY PUT of same strike)




A Straddle is a volatility strategy and is used when the stock price / index is expected to show large movements. This strategy involves buying a call as well as put on the same stock / index for the same maturity and strike price, to take advantage of a movement in either direction, a soaring or plummeting value of the stock / index. If the price of the stock / index increases, the call is exercised while the put expires worthless and if the price of the stock / index decreases, the put is exercised, the call expires worthless.
Market Scenario: Volatile
Risk: Limited (Net Premium Paid)
Reward: Unlimited
BEP:   Upper Break-even Point = Strike Price of Long Call + Net Premium Paid
Lower Break-even Point = Strike Price of Long Put - Net Premium Paid
EXAMPLE:
Entry:
SPOT
5100


STRIKE
PREMIUM
BUY CALL
5000
137
BUY PUT
5000
70
UPPER BEP: 5000 + 207 = 5207                                          LOWER BEP: 5000 – 207 = 4793
On Exit if:
SPOT
CALL PAY-OFF
PUT PAY-OFF
STRATEGY PAY-OFF
4600
-137
330
193
4700
-137
230
93
4793
-137
137
0
4800
-137
130
-7
4900
-137
30
-107
5000
-137
-70
-207
5100
-37
-70
-107
5200
63
-70
-7
5207
70
-70
0
5300
163
-70
93
5400
263
-70
193




Long Straddle - Strategy Pay-Off