Your understanding of the overall P&L is correct, however the option that you win on must move far enough to make up for the total cost of the 2 options bought before you begin to make money.
Also, what you refer to is called a “strangle”. A straddle would be if both put and call were at the exact same strike.
Ken
From: ConservativeOptionS
Sent: Friday, June 11, 2010 1:44 PM
To: ConservativeOptionS
Subject: [ConservativeOption
Lately I've been experimenting with straddles (I hope I've got my terminology correct)where I buy a put and a call about one strike apart for the same month. As far as I can see, max loss is the cost of the two options and max gain is basically unlimited regardless of whether the stock goes up or goes down. I dipped my toe in a bit with BP and BAC, figuring their volatility would give me some practice in using this method. The past two days have been interesting watching them ride up and/or down on the u-shaped P&L graph.
Any thoughts on this?
Lou
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