How to use it
- Choose straddle or strangle and buy or sell.
- Enter the strike (or the put and call strikes for a strangle).
- Enter the call premium and the put premium per share.
- Enter contracts, shares per contract (usually 100) and a price at expiration.
Formula
Total premium N = call premium + put premium. At expiration price P, per share:
- Long P/L = max(0, P − call strike) + max(0, put strike − P) − N
- Short P/L = −(long P/L)
- Break-evens: put strike − N and call strike + N
- Move needed = N ÷ average strike
- Long: maximum loss N; short: maximum profit N
Worked example
A long straddle at 100, call 4, put 3.50, one contract:
- Total premium (4 + 3.50) × 100 = 750.00, also the maximum loss.
- Break-evens 92.5 and 107.5; the stock needs a 7.5 % move.
- At 115: 15 − 7.50 = 7.50 × 100 = 750.00 profit.
- At 100: both options expire worthless, −750.00.
A 95/105 strangle for 2 + 1.50 costs 350.00, breaks even at 91.5 and 108.5 and loses all 350.00 anywhere between the strikes.
Tips
- Long straddles are usually bought before events that can move the price a lot, such as earnings; implied volatility tends to fall right after.
- Compare the move needed with the move implied by option prices; the implied volatility calculator helps.
- Results are at expiration; before it, the options still have time value, so the position is worth a different amount.