Long straddle | Finance & Capital Markets | Khan Academy

Suppose ABCD company is a pharmaceutical company A new drug is being tested If you are sure The company’s stock price is now $50 per share But you are sure that if the new drug succeeds The company's stock price will soar But you are also convinced that if The company's new drug test failed The company's stock price will fall to 5 or 10 dollars So if you want to make money Make money based on your judgment on the stock price I am not suggesting you Do this Reality is always crueler than talking on paper But one way you can do it is Simultaneous purchase of call and put options on stocks If the stock falls Put options will make money And if the stock rises Call options will make money If the test is successful, the stock will soar Let's draw a return chart So if the stock goes down If the stock falls Suppose it drops to 0 You should exercise a put option You can buy stocks for $0 Then execute the put option Sell ​​again at the market price of 50 yuan A put option is the right to sell the stock at $50 Of course we are discussing the total value of the option before expiration If the value of the stock on the expiry date of the option is 0 Then the value of the put option is $50 And call options are obviously worthless If the stock value is 0, you will not exercise the call option You don’t want to spend $50 on something with zero value So as long as the stock value is 0 dollars And 50 dollars You all exercise put options But the value of put options will gradually decrease as the stock price rises And when the stock price is higher than $50, you will not exercise the put option If the stock price is higher than $50 you will want to exercise the call option If the stock price is $60 on the expiry date then your call option is worth $10 Because you have the right to spend $50 to buy stocks with call options And the stock can sell for $60 So the value of your call option Will rise So you can see such a situation The total value of the call and put option combination is zero If the stock price remains unchanged at $50 Your options are worthless But if the stock price fluctuates sharply It doesn't matter whether it rises or falls This is called straddle combination When you buy at the same time Long positions in call options and put options This is called multi-head straddle combination You will profit from sharp stock price fluctuations When you think about it from a profit and loss perspective You just moved the revenue line down The amount you paid for the two options In this example we paid $20 for two options So in this example we execute the put option But it’s not $50 We have to subtract the $20 paid to buy the option So we only made $30 And at this point we did not exercise any options Because none of them has any value No reason to execute them In fact, we lost the $20 that we spent on buying two options So we mark it here And if the stock price is higher than $50, we start to make money I draw the option chart here It's like this This is the income graph Looks like this So when you factor in the cost of buying options You will see now If the stock price Only the results of the drug experiment come out before the option expires And the stock price changes as you expect you to make money If the stock price falls into this area That is, the stock price is less than 30 Or higher than 70 If any of the above two situations occurs Straddle combination This long straddle combination will make you money

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