Combining Options

The Straddle

A long straddle combines one call and one put at the same strike; payoff grows with the size of the move away from the strike.

highlighted = computed this step

Payoff in both directions

A long straddle buys both sides at the same strike. The payoff grows with the size of the move away from the strike, in either direction. At $100.00 the payoff is $0.00.

payoff(S)=max⁡(S−K,0)+max⁡(K−S,0)=∣S−K∣\text{payoff}(S)=\max(S-K,0)+\max(K-S,0) = |S-K|
Long straddlePayoff at expiry.Long straddleK=$100$80$100$120$-2.00$+0.00$+22.00Underlying price at expiryPayoff

Payoff values

At $80.00 payoff is $20.00; at $100.00 payoff is $0.00; at $120.00 payoff is $20.00.

payoffstraddle=∣S−K∣\text{payoff}_{\text{straddle}} = |S-K|
Long straddlePayoff at expiry.Long straddleK=$100$80$100$120$-2.00$+0.00$+22.00Underlying price at expiryPayoff

Payoff convention

This chart is at expiry only and shows payoff, not profit. A straddle pays two premiums, so it is profitable only when prices move enough away from strike in either direction. This is not an investment recommendation.

payoff≠profit\text{payoff} \neq \text{profit}
Long straddlePayoff at expiry.Long straddleK=$100$80$100$120$-2.00$+0.00$+22.00Underlying price at expiryPayoff