strategies
Straddle Breakeven
A straddle (buy/sell ATM call + ATM put) profits from big moves (long) or stillness (short). Breakevens define the required move size.
Formula
Long Straddle: BE_up = Strike + Total Premium Paid BE_down = Strike - Total Premium Paid
Variables
- Strike
- ATM strike price (same for both legs)
- Total Premium
- Cost of call + cost of put
- BE_up
- Upper breakeven (stock must rise above)
- BE_down
- Lower breakeven (stock must fall below)
Worked Example
Inputs
- Strike
- $100 (ATM)
- Call Price
- $4.62
- Put Price
- $3.38
Calculation Steps
- 1
Total Premium = $4.62 + $3.38 = $8.00 - 2
BE up = $100 + $8 = $108 - 3
BE down = $100 - $8 = $92 - 4
Stock must move ±$8 (8%) to break even
Result: Breakevens: $92 and $108 — need ±8% move to profit
Intuition
The straddle price IS the market's expected move for that period. Before earnings, compare the straddle cost to the stock's average historical earnings move. If the stock typically moves 10% on earnings but the straddle costs 8%, there may be value in buying.