Straddles and Combinations Flashcards
When will a customer lose and gain on a straddle?
If the market stays flat, customer will LOSE on a LONG straddle. Conversely, customer will GAIN on a SHORT straddle
What makes up a long straddle?
Buying a call and buying a put (buy, buy)
What is the market sentiment for a long straddle?
Both bearish and bullish
How do you profit on a long straddle?
The price goes up or down by more than total premiums paid
What makes up a short straddle?
Selling a call and selling a put (sell, sell)
What is the market sentiment on a short saddle?
Neutral
How do you profit on a short straddle?
If price stays the SAME
What is the key rule to having a straddle?
- It is a buy, buy or sell, sell contract
- same strike price
- same expiration
What makes a combination or strangle?
- different strike price (combination)
- different strike price and/or expiration (strangle)
How do you stack a straddle?
Buy 1 ABC Jan 50 Call @ $5
Buy 1 ABC Jan 50 Put @ $4
What is the maximum loss on a long straddle
The total of the premiums (the debit)
How do you breakeven on a long straddle?
The debit must be recovered! Add the debit to CALL strike price for upside BE, subtract debit from PUT strike price for downside BE
What is the max potential gain on a long straddle?
Unlimited (the owner owns a call)
What is the max gain on a short straddle?
The premiums received
How do you breakeven on a short straddle?
The credit must be recovered! Add credit to call strike for upside BE; subtract credit from put strike price for downside BE
