Two Short Straddle Examples (Basic Options 21)

Two Short Straddle Examples- Basic Options 21.

In this video, we continue with the Short Straddle by looking at an example using Dow chemical and an example using JP Morgan

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Vid Text:

Hello and Welcome. In this video we will continue looking at the Short Straddle trade by looking at 2 examples of Short Straddle trades.

You may remember from my video on the Short Straddle that for a Short Straddle trade, a trader sells two Options on the same stock, a Call and a Put, both with the same Strike Price and expiration.

Selling both a Call Option and a Put Option creates a range around the current price. If the price of the stock remains within that range, the trade is profitable. In other words, the trade is profitable if the price of the stock does not go above a certain price or below a certain price.

The profit or loss from this trade becomes the difference between the up-front premium the trader is paid for selling the Options, and the amount that the underlying stock price increases above or falls below the Strike Price.

Let's look at an example using Dow Chemical. At the time of making this video, Dow is currently $50.64 per share. A trader could place a Short Straddle on Dow by selling the $50 Call Option and selling the $50 Put Option that both expire in about 7 weeks.

The Call Option costs $2.01 and the Put Option costs $1.54. Selling both means that the trader collects a total of $3.55 per share up front for selling the Options. This means that, for the trade to be profitable, the price of Dow must remain within $3.55 of the $50 Strike Price. In other words, for the trade to be profitable, the price of Dow has to remain above $46.55 and below $53.55 up until the time that the options expire.

The $3.55 premium the trader was paid up front for the Options is the trader's maximum potential profit. The Strike Price for both Options is $50. If the price of Dow is exactly at $50 when the options expire, neither Option has any intrinsic value. This means that both Options expire worthless, and the trader keeps the $3.55 that he was paid up front.

As the price of the stock moves away from the $50 Strike Price, one Option still has no intrinsic value. However, the other Option does have intrinsic value. This means that the profit the trader made selling the Options declines by that value.

If the price of Dow is between the $50 Strike Price and the break-even points, the trader's profit will be between 0 and $3.55. If the price of Dow rises above $53.55, or drops below $46.45, the trade loses money.

If the price of Dow is above the $50 Strike Price, the trader's profit or loss is the $3.55 Premium that he collected up front selling the options, minus the difference between the current price of Dow and the $50 Strike Price.

If the price of Dow is below the $50 Strike Price, the trader's profit or loss is the $3.55 Premium that he collected up front selling the options, minus the difference between the $50 Strike Price and the current price of Dow

Let's look at another example using JP Morgan. At the time of making this video, JPM is currently $59.90 per share. A trader could place a Short Straddle on JPM by selling the $60 Call Option and selling the $60 Put Option that both expire in about 7 weeks.

The Call Option costs $1.55 and the Put Option costs $1.93. Selling both means that the trader collects a total of $3.48 per share up front for selling the Options. This means that, for the trade to be profitable, the price of JPM must remain within $3.48 of the $60 Strike Price. In other words, for the trade to be profitable, the price of JPM has to remain above $56.52 and below $63.48 up until the time that the options expire in about 7 weeks.

The $3.48 premium the trader was paid up front for the Options is the trader's maximum potential profit. The Strike Price for both Options is $60. If the price of JPM is exactly at $60 when the options expire, neither Option has any intrinsic value. This means that both Options expire worthless, and the trader keeps the $3.48 that he was paid up front.

If the price of JPM is between the $60 Strike Price and the break-even points, the trader's profit will be between 0 and $3.48.

If the price of JPM rises above $63.48, or drops below $56.52, the trade loses money.

If the price of JPM is above the $60 Strike Price, the trader's profit or loss is the $3.48 Premium that he collected up front selling the options, minus the difference between the current price of JPM and the $60 Strike Price.

If the price of JPM is below the $60 Strike Price, the trader's profit or loss is the $3.48 Premium that he collected up front selling the options, minus the difference between the $60 Strike Price and the current price of JPM.

So that is 2 examples of Short Straddle trades. I hope that you enjoyed this video. Thanks for watching.

by Tekmnd via InformedTrades