Straddles

Question 1

Straddle Definition

Answer 1

Straddle - purchase or sale of an equal number of puts and calls , on the same underlying stock, with the same exercise price and expiration.

Question 2

Long Straddle

Answer 2

Investor purchases a straddle expects the underlying stock to be subject to wide price fluctuations.

Question 3

Long Straddle Break Even

Answer 3

Breakeven point. First break even: sum of both premiums plus the strike price. Second break even: sum of premiums minus strike price.

Question 4

Long Straddle Maximum Gain

Answer 4

The straddle buyer hopes the stock will rise above the higher breakeven point or fall below the lower breakeven point.

Question 5

Long Straddle Maximum Loss

Answer 5

If the underlying stock does not exhibit volatility and remains stable, both options would expire unexercised and, resulting in a loss equal to the total premiums paid.

Question 6

Short Straddle

Answer 6

An investor sells calls and puts on the same underlying stock with the same strike price and the same expiration date. Investor is neutral on the stock and will profit if the stock prices remains unchanged.

Question 7

Short Straddle Break Even

Answer 7

Breakeven point. First break even: sum of both premiums plus the strike price. Second break even: sum of premiums minus strike price.

Question 8

Short Straddle Maximum Gain

Answer 8

Buyer is hoping for stability. The seller will earn a profit as long as the stock price is between the two breakeven points.

Question 9

Short Straddle Maximum Loss

Answer 9

Possible unlimited losses. If the stock rises, the short call side of the straddle exposes the investor to possible large losses.