Long straddle
Motive: To profit from big price move either up or down in the underlying stock.
Example : nifty trading at 10600 28 Feb
Buy call of 10600 @ 100
Buy put of 10600 @ 100
A long straddle consist of one long call and one short put. Both having same underlying stock, same strike and expiry. A pay off or net cost will be sum of both call and put here 200 rs will be cost. While profit if the underlying stock rises above the upper break even point or fall below break even point. Profit potential is unlimited on the upside and downside maximum to strike price.
Maximum profit.....
Upside profit unlimited
Downside maximum to strike price
Nifty can rise up side anywhere but in example above 10800 whatever it goes up beyond 10800 it will be profit after deduction of expense. Same way below 10400 it will start giving profit up to price fall to zero.
Maximum risk.....
Potential loss is limited to total premium cost of the straddle plus expenses. Here, maximum loss is rs. 200
Break even price.....
Upside break even above 10800
Downside break even below 10600
Appropriate situation of market .....
During the uncertainty of market trend where stock or index move either side I.e. high volatility
Strategy object.....
A long or purchased straddle is useful when big stock price change but direction is uncertain
Like earning report, new product introduction, election, budget special packages, specific news etc
While short straddle strategy is useful .....
To profit in range bound market or no price movement in the underlying stock
It consist of one short call and put option of same expiry and strike price.
Example: selling option of ntpc
Call 135 strike @ 2.75
Put 135 strike @ 3.00
Here, maximum profit will be rs 5.75 if stock expire at 135 rs
Maximum loss .....
Upside loss is unlimited
Downside loss is 135- less premium received
Break even point will be .....
1) strike plus total premium
Here, 135+5.75= 140.75
2) strike price minus premium
Here, 135-5.75= 139.25
Market trend.....
It is useful when narrow range move expected, ideal forecast is neutral or sideways I.e. low volatility
Best time to use .....
During dividend time frame on ex date it is useful to take position when dividend is much higher.
Low beta stock one can take risk as and when it be volatile.
From my experience it is best strategy used in nifty index if one trade for entire year net outcome will be positive only.
Thanks
Motive: To profit from big price move either up or down in the underlying stock.
Example : nifty trading at 10600 28 Feb
Buy call of 10600 @ 100
Buy put of 10600 @ 100
A long straddle consist of one long call and one short put. Both having same underlying stock, same strike and expiry. A pay off or net cost will be sum of both call and put here 200 rs will be cost. While profit if the underlying stock rises above the upper break even point or fall below break even point. Profit potential is unlimited on the upside and downside maximum to strike price.
Maximum profit.....
Upside profit unlimited
Downside maximum to strike price
Nifty can rise up side anywhere but in example above 10800 whatever it goes up beyond 10800 it will be profit after deduction of expense. Same way below 10400 it will start giving profit up to price fall to zero.
Maximum risk.....
Potential loss is limited to total premium cost of the straddle plus expenses. Here, maximum loss is rs. 200
Break even price.....
Upside break even above 10800
Downside break even below 10600
Appropriate situation of market .....
During the uncertainty of market trend where stock or index move either side I.e. high volatility
Strategy object.....
A long or purchased straddle is useful when big stock price change but direction is uncertain
Like earning report, new product introduction, election, budget special packages, specific news etc
While short straddle strategy is useful .....
To profit in range bound market or no price movement in the underlying stock
It consist of one short call and put option of same expiry and strike price.
Example: selling option of ntpc
Call 135 strike @ 2.75
Put 135 strike @ 3.00
Here, maximum profit will be rs 5.75 if stock expire at 135 rs
Maximum loss .....
Upside loss is unlimited
Downside loss is 135- less premium received
Break even point will be .....
1) strike plus total premium
Here, 135+5.75= 140.75
2) strike price minus premium
Here, 135-5.75= 139.25
Market trend.....
It is useful when narrow range move expected, ideal forecast is neutral or sideways I.e. low volatility
Best time to use .....
During dividend time frame on ex date it is useful to take position when dividend is much higher.
Low beta stock one can take risk as and when it be volatile.
From my experience it is best strategy used in nifty index if one trade for entire year net outcome will be positive only.
Thanks
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