53 lines
2.4 KiB
Plaintext
53 lines
2.4 KiB
Plaintext
515
|
||
OPTION TrAdINg STrATegIeS
|
||
Strategy 7: Long Straddle (Long Call + Long put)
|
||
example. Buy August $1,200 gold futures call at a premium of $38.80/oz ($3,880) and simultane-
|
||
ously buy an August $1,200 gold futures put at a premium of $38.70/oz ($3,870). (See Table 35.7
|
||
and Figure 35.7.)
|
||
Comment. The long straddle position is a volatility bet. The buyer of a straddle does not have
|
||
any opinion regarding the probable price direction; he merely believes that option premiums
|
||
are underpriced relative to the potential market volatility. Andrew T obias once offered a some -
|
||
what more cynical perspective of this type of trade
|
||
1: “Indeed, if you haven’t any idea of which
|
||
way the [market] is headed but feel it is headed someplace, you can buy both a put and a call
|
||
on it. That’s called a straddle and involves enough commissions to keep your broker smiling
|
||
all week.”
|
||
As can be seen in Figure 35.7, the long straddle position will be unprofitable for a wide price
|
||
range centered at the current price. Since this region represents the range of the most probable price
|
||
outcomes, the long straddle position has a large probability of loss. In return for accepting a large
|
||
probability of loss, the buyer of a straddle enjoys unlimited profit potential in the event of either a
|
||
large price rise or a large price decline. The maximum loss on a long straddle position is equal to the
|
||
total premium paid for both the long call and long put and will only be experienced if the expiration
|
||
price is equal to the futures price at the time the options were purchased. (Implicit assumption: both
|
||
the call and put are at-the-money options.)
|
||
tabLe 35.7 profit/Loss Calculations: Long Straddle (Long Call + Long put)
|
||
(1) (2) (3) (4) (5) (6) (7)
|
||
Futures price
|
||
at expiration
|
||
($/oz)
|
||
premium of august
|
||
$1,200 Call at
|
||
Initiation ($/oz)
|
||
premium of august
|
||
$1,200 put at
|
||
Initiation ($/oz)
|
||
$ amount of
|
||
total premium
|
||
paid
|
||
Call Value at
|
||
expiration
|
||
put Value at
|
||
expiration
|
||
profit/Loss on
|
||
position
|
||
[(5) + (6) – (4)]
|
||
1,000 38.8 38.7 $7,750 $0 $20,000 $12,250
|
||
1,050 38.8 38.7 $7,750 $0 $15,000 $7,250
|
||
1,100 38.8 38.7 $7,750 $0 $10,000 $2,250
|
||
1,150 38.8 38.7 $7,750 $0 $5,000 –$2,750
|
||
1,200 38.8 38.7 $7,750 $0 $0 –$7,750
|
||
1,250 38.8 38.7 $7,750 $5,000 $0 –$2,750
|
||
1,300 38.8 38.7 $7,750 $10,000 $0 $2,250
|
||
1,350 38.8 38.7 $7,750 $15,000 $0 $7,250
|
||
1,400 38.8 38.7 $7,750 $20,000 $0 $12,250
|
||
1 Andrew T obias, Getting By on $100,000 a Year (and Other Sad T ales) (New Y ork, NY: Simon & Schuster, 1980). |