Sure, here's an example of a straddle trade:
Example:
Suppose Apple (AAPL) stock is trading at $150, and a trader believes that the upcoming earnings report could cause significant volatility. The trader decides to execute a long straddle by buying 1 call option and 1 put option with the same strike price of $150 and the same expiration date, 30 days from now.
Trade Details:
- Buy 1 AAPL Call Option with Strike Price $150, Expiration Date 30 Days from Now
- Buy 1 AAPL Put Option with Strike Price $150, Expiration Date 30 Days from Now
Premium Paid:
Assuming the call option is trading at $3.50 per share and the put option is trading at $2.50 per share, the total premium paid for the straddle would be $6.00 per share ($3.50 + $2.50).
Break-Even Points:
The break-even points for the straddle are:
- Strike Price + Total Premium = $150 + $6.00 = $156
- Strike Price - Total Premium = $150 - $6.00 = $144
Scenario Analysis:
- If AAPL Stock Price Rises Above $156: The call option will be in the money, and the put option will be out of the money. The trader will profit from the call option and will have the right to buy AAPL stock at $150, which may be exercised if beneficial.
- If AAPL Stock Price Falls Below $144: The put option will be in the money, and the call option will be out of the money. The trader will profit from the put option and will have the right to sell AAPL stock at $150, which may be exercised if beneficial.
- If AAPL Stock Price is Exactly at $150: Both options will be at-the-money, and the trader will have the right to buy or sell AAPL stock at $150, but neither option will be in the money, resulting in a loss of the premium paid.
This example illustrates how a straddle trade can be used to profit from significant price movements in either direction, while also highlighting the importance of managing risk and understanding the potential for losses if the stock price remains range-bound.
1/10/2025 07:29am
