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Grand Rapids, MI | buck1400 has a good handle on this one. You say the the "initial risk" is $15MM per contract?....I guess I don't agree. The risk is far greater than this as buck1400 points out. At $20 beans you would lose $4/bu on your $13/$13 straddle, if you captured $3 in initial premium. This is $20MM per contract.
The loss on one would not be offset by the gain in the other, since one is going to expire worthless. You will therefore have no exposure on one of the positions. On the other you will have exposure for the difference between market price and the strike. Take the original premium earned and subtract this difference and you will have your profit (loss).
So in the above example the put option expires worthless, a good thing for you since you sold it. But the call....since you sold someone the right to buy soys at $13 and the market is now at $20 you will incur a $7 loss on this contract. Take the $3 original premium earned and subtract the $7 and you get a $4 loss. If beans would go to $30 your loss would be $14 per bu or $70,000 per contract!
Make sense? | |
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Do any of you trade options in this manner?
