Question

A one-month European put option on Bitcoin is with the strike price of $8,705 is trading at $480. A one-month European call option on Bitcoin with the strike price of $8,705 is trading at $500. An investor longs a straddle using these options. At which prices of Bitcoin at the maturity of the options will this investor break even (i.e. no loss and no gain)?

Answer #1

Long Straddle means buying call and put option at same strike. This is a strategy for high volatile market. If an investor thinks that stock price will move drastically, either up or down. Then the investor enters into this strategy.

When you buy call and put, you pay premiums.

So at the start of the strategy the outflow is = Premium from call + Premium from put

= 480 + 500

= 980

Now $980 is what an investor will have to recover in order to reach breakeven. So the stock will either have to move $980 up (Profit from long call) from Strike $8,705 or move $980 down (Profit from Long Put) from strike $8,705

So the Breakeven points will be = Strike Price +/- Initial Outflow.

= 8705 + / - 980

= $7,725 - $9,685

So if the Bitcoin price is either $7725 or $9,685. Then the investor will reach break even

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