Question

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Short Straddle Short Straddle Composition: Short a call and a put with the same strike and expiration $35.00 $30.00 Max Profit: the premium collected (credit) $25.00 Max Loss: T Unlimited to the upside, limited by the price of the stock to the downside $20.00 $15.00 - -- Short Call | BEP: There are 2 --strike minus credit & strike plus credit • Short Put Short Straddle $10.00 $5.00 $- Delta: short call = short delta, short put = long delta Assuming the strike is at the price of the underlying, delta of position will be zero If constructed away from the price of the stock, position will be long or short net delta 11,090 1,110 . 1,130 1,150 1,11 1,190 $(5.00) $(10.00) The short position in the straddle has the opposite risk/reward profile from that of the long straddle. In the short straddle, your position profits when the underlying remains stable, and large movements in the price of the underlying (in either direction) lead to large losses. Thus the short straddle requires close monitoring, much more so than the long straddle. The maximum profit is the premium collected, while the maximum risk is unlimited to the upside, and limited to the price of the underlying to the downside. Assuming the strike price is set at the price of the underlying, you earn the maximum profit when the underlying price does not move at all.

Answer 1

2]

TUV Stock

1]

Net premium received for each straddle = Jan 7.50 call option premium + Jan 7.50 put option premium.

The premium received for selling any option is the bid price.

Net premium received for each straddle = $0.50 + $1.88 = $2.38

Net premium received for selling 3 straddles = $2.38 * 3 = $7.14

2]

Upper breakeven = strike price + net premium received for each straddle

Upper breakeven = $7.50 + $2.38 = $9.88

Lower breakeven = strike price - net premium received for each straddle

Lower breakeven = $7.50 - $2.38 = $5.12

3]

If the stock rallies to $11 :

The put option will expire worthless.

Loss on each call option = stock price at expiration - strike price = $11 - $7.50 = $3.50

Net premium received on each straddle = $2.38

Loss on each straddle = loss on each call option - net premium received on each straddle

Loss on each straddle = $3.50 - $2.38 = $1.12

Loss on 3 straddles = $1.12 * 3 = $3.36

4]

If the stock moves to $6 :

The call option will expire worthless.

Loss on each put option = strike price - stock price at expiration = $7.50 - $6 = $1.50

Net premium received on each straddle = $2.38

Profit on each straddle = net premium received on each straddle - loss on each put option

Profit on each straddle = $2.38 - $1.50 = $0.88

Loss on 3 straddles = $0.88 * 3 = $2.64

5]

If the stock falls to $4 :

The call option will expire worthless.

Loss on each put option = strike price - stock price at expiration = $7.50 - $4 = $3.50

Net premium received on each straddle = $2.38

Loss on each straddle = loss on each put option - net premium received on each straddle

Loss on each straddle = $3.50 - $2.38 = $1.12

Loss on 3 straddles = $1.12 * 3 = $3.36