← Strategy LabLesson 13 · 4:19
Covered straddle
Summary
A covered straddle is owning 100 shares and selling a $100 call for $3.45 and a $100 put for $3.41, both at the current price, collecting $686, for when you expect XYZ to sit still. The most you can make is the $686, and if XYZ went to zero you would lose $19,314 because below $100 you own 200 shares. You break even at $96.57, $100 minus half of $6.86.
Key terms
- covered straddle
- Owning 100 shares while selling a call and a put at the same strike, the current price.
- covered strangle
- Owning 100 shares while selling a call above the price and a put below it.
- same strike
- When the call and the put you sell share one strike price, here $100.
- assigned
- When the option you sold is exercised against you, so a sold put makes you buy the shares at its strike.
- premium
- What you pay for an option, which you don't get back, and the most you can lose when you buy one.
- break-even
- The stock price on the last day where you neither make nor lose money: strike plus premium for a call, strike minus premium for a put.
- time value
- The rest of an option's price, paid for the chance things get better before the end, and gone by the last day.
- called away
- Having your shares sold at the strike price because you were assigned on a call you sold.
Check yourself
Answer each question to see why the right answer is right.
1. Where does the lesson's covered straddle break even?
2. XYZ ends at $90. What is your result?
3. XYZ ends at $110. What do you make?
4. Compared with the covered strangle in the last lesson, why does the covered straddle collect more cash?
5. At $95, what does time do to the covered straddle's result?
Finished the video and the quiz? .