Stock Option Return - Long Straddle Return

Long Straddle Return

The long straddle (see straddle) is a bullish and a bearish strategy and consists of purchasing a put option and a call option with the same strike prices and expiration. The long straddle is profitable if the underlying stock or index makes a movement upward or downward offsetting the initial combined purchase price of the options. A long straddle becomes profitable if the stock or index moves more than the combined purchase prices of the options away from the strike price of the options.

% Return = ( |stock price @ expiration - strike price| - (long call price + long put price)] / (long call price + long put price)

For example, for stock RST and a long straddle consisting of a purchased call option with a price of $1.50 and a purchased put option with a price of $2.00 with a strike price of $50. Assume the initial price of RST is $50, and at option expiration, the price of RST is $55.

% Return = /(1.5+2.0) = 42.9%