Profit and Loss Calculations for Straddles and Combinations

Straddles and combinations involve holding both a call and a put on the same underlying stock. Unlike spreads (which use the same option type at different strikes), these strategies use both option types. The breakeven formulas change because there are two breakeven points: one on the upside and one on the downside.

Long Straddle

Buy a call and a put with the same strike and same expiration.

• Outlook: Volatile; you expect a large move in either direction
• Maximum gain: Unlimited (the call side has unlimited upside)
• Maximum loss: Total premiums paid (both call and put premiums)
• Upside breakeven = Strike price + total premiums
• Downside breakeven = Strike price - total premiums
• Profitable when: The stock moves beyond either breakeven point

Example: Buy 1 ABC 50 call at $4, buy 1 ABC 50 put at $3

• Total premiums = $4 + $3 = $7
• Upside breakeven = $50 + $7 = $57
• Downside breakeven = $50 - $7 = $43
• Max loss = $7 x 100 = $700 (both options expire worthless)
• Max gain = unlimited (on the upside)

The stock must move more than $7 in either direction from the strike for this position to be profitable.

Short Straddle

Write a call and a put with the same strike and same expiration.

• Outlook: Neutral; you expect the stock to stay near the strike
• Maximum gain: Total premiums received
• Maximum loss: Unlimited (the short call has unlimited risk)
• Upside breakeven = Strike price + total premiums
• Downside breakeven = Strike price - total premiums
• Profitable when: The stock stays between the two breakeven points

Example: Write 1 ABC 50 call at $4, write 1 ABC 50 put at $3

• Total premiums = $4 + $3 = $7
• Upside breakeven = $50 + $7 = $57
• Downside breakeven = $50 - $7 = $43
• Max gain = $7 x 100 = $700 (both options expire worthless)
• Max loss = unlimited (on the upside)

Think of it this way: The short straddle writer is betting the stock stays put. As long as it stays between $43 and $57, the writer keeps some or all of the $700 in premiums collected. If the stock makes a big move in either direction, the writer loses.

Combinations (Strangles)

Buy or write a call and a put with different strikes but the same expiration. The call strike is higher than the put strike.

Long Combination

• Upside breakeven = Call strike + total premiums
• Downside breakeven = Put strike - total premiums
• Maximum gain: Unlimited (call side)
• Maximum loss: Total premiums paid

Short Combination

• Upside breakeven = Call strike + total premiums
• Downside breakeven = Put strike - total premiums
• Maximum gain: Total premiums received
• Maximum loss: Unlimited (short call side)

Key difference from straddles: Because the strikes are different, the stock must move further for a long combination to be profitable. The "dead zone" between the two strikes is wider.

Exam Tip: Gotchas

• Straddle breakevens use ONE strike +/- total premiums. Combination breakevens use TWO strikes: add total premiums to the CALL strike (upside) and subtract total premiums from the PUT strike (downside).
• Buyer and writer share the same breakeven points. The difference is who profits on which side of those breakevens.
• A long straddle is not profitable just because the stock moved. It must move enough to cover both premiums paid.

Straddle vs. Combination Comparison

Testing Profitability at a Specific Price

The exam frequently gives you a stock price and asks if the position is profitable. Here is the process:

1. Calculate both breakeven points
2. If stock price is above the upside breakeven or below the downside breakeven, the long position profits
3. If stock price is between the two breakevens, the short position profits

Example: Long straddle with $50 strike, total premiums of $6. Stock closes at $58.

• Upside breakeven = $50 + $6 = $56
• $58 > $56, so the long straddle is profitable by $2 per share

Exam Tip: Gotchas

• Follow this sequence on exam day: Identify same or different strikes, calculate total premiums, apply the breakeven formula, then check the stock price vs. breakevens to determine profitability.
• Check both sides. A long straddle that profits on the downside (stock drops below the downside breakeven) is just as valid as one that profits on the upside. The exam may test either direction.