What is Buy Straddle? | How We Trade Buy Straddle?
Buy Straddle
• Buy Straddle, It is used when the investor is expecting underlying to show very large movement. The investor expects the underlying to show high volatility Upside or Downside.
• This strategy involves Buying a Call as well as Put on the same underlying for the same maturity and Strike
• Price. It creates a good income for the investor.
• However, in case the underlying moves in either direction, up or down significantly, the investor’s profit can be unlimited.
• This is a limited risk strategy and should be carefully adopted only when the expected volatility in the market is very high.
• Investor View: Neutral direction but expecting high volatility in underlying movement.
• Risk: limited.
• Reward: Unlimited.
• Lower Breakeven: Strike Price – net premium paid.
• Higher Breakeven: Strike Price + net premium paid.
Illustration
• Eg. Nifty is currently trading @ 15500. Buy Straddle can be created by Buying Call and Put Option for Strike 15500 having premium of 65 and 35 respectively. The net outflow of premium is 100.
|
Strategy |
Stock /Index |
Type |
Strike |
Premium |
|
Buy Straddle |
NIFTY (Lot size 75) |
Buy CALL |
15500 |
65 |
|
Buy Put |
15500 |
35 |
The Payoff Schedule for the above is below.
|
CMP |
BUY 15500 CALL @ 65 |
BUY 15500 PUT @ 35 |
NET FLOW |
LOT SIZE |
P&L |
|
14900 |
-65 |
565 |
500 |
75 |
37500 |
|
15000 |
-65 |
465 |
400 |
75 |
30000 |
|
15100 |
-65 |
365 |
300 |
75 |
22500 |
|
15200 |
-65 |
265 |
200 |
75 |
15000 |
|
15300 |
-65 |
165 |
100 |
75 |
7500 |
|
15400 |
-65 |
65 |
0 |
75 |
0 |
|
15500 |
-65 |
-35 |
-100 |
75 |
-7500 |
|
15600 |
35 |
-35 |
0 |
75 |
0 |
|
15700 |
135 |
-35 |
100 |
75 |
7500 |
|
15800 |
235 |
-35 |
200 |
75 |
15000 |
|
15900 |
335 |
-35 |
300 |
75 |
22500 |
|
16000 |
435 |
-35 |
400 |
75 |
30000 |
Payoff Charts
In the above chart, the breakeven happens the moment Nifty crosses 15400 or 15600, and
risk is limited to a maximum of 7500 (calculated as Lot size * Premium Paid). Here it is important to note that the premium is calculated as the sum of premium paid for the Call and Put option
Other Articles
Disclaimer :
Blog Provides Views and Opinion as Educational Purpose Only, We are not responsible for any of your Profit / Loss with this blog Suggestions. The owner of this blog is not SEBI registered, consult your Financial Advisor before taking any Position.