With the US election approaching in November as the UK continues to negotiate a potentially difficult divorce from the European Union, we can expect a bit more volatility in the SPY over the coming months.
Let’s buy the Nov16 218 Straddle (Expiry November 18) to benefit from a move – either up or down.
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Entry: buy SPY Nov16 218 straddle at $10.62
buy SPY Nov16 218 Call at $4.95
& buy SPY Nov16 218 Put at $5.67
Maximum profit at expiry is unlimited
By having long positions in both call and put options, straddles can achieve large profits no matter which way the underlying stock price heads, provided the move is strong enough.
Maximum profit at expiry is achieved when the (underlying price > Strike Price of Long Call + Premium Paid or Price Underlying <Strike Price of Long Put – Premium Paid).
Breakeven Points at expiry
There are 2 breakeven points at expiry:
upper breakeven point = Strike Price of Long Call + Premium
= 218 + 10.62
lower breakeven point = Strike Price of Long Put - Premium
= 218 – 10.62
Maximum loss occurs when price of underlying = Strike Price of Straddle
Maximum loss is limited to premium paid
Maximum loss is $10.62 or $1,062 per Straddle
Target at expiry: well above 228.62 or well below 207.68
Time horizon: 88 days
— Edited by Michael McKenna
For more on contract options click here
Non-independent investment research disclaimer applies. Read more