Break even Math

F&O
1

Newbie question, so please explain accordingly.

So with the short straddle the break even points (BEP) are calculated as the strike +/- the premium collected with the call and put.

So for example Nifty, expiry the coming month

-1x 24SEP2020 11500CE - ₹ 220.25

-1x 24SEP2020 11500PE - ₹ 234

So premium collected is 454.25

So BEP’s are 11046 to 11954 on upper and lower side.

Simple Math

BUT if I add one more put at a lower put say

-1x 24SEP2020 11300PE - ₹ 158

The BEP’s as per Opstra changed to 11094.0-12112.0

I get that the upper BEP got the added room of 158 points raising it to 11954 from 12112.

But how has the lower BEP changed to 11094, how 48 points? Could some one please explain the calculation to me?

Thanks!

2

To keep it simple
You sold two PEs so downward movement will result in loss of two points. Hence the upper breakeven.

To show the math- on downward movement.
The break even for 11500 PE is 11500-234=11266.
The break even for 11300 PE is 11300-158=11142.
If spot moves below 11142 the gain from call would be 220.
This should cover the loss of one put 11500 PE till 11142 and the loss amount would be 11266-11142=124 at spot of 11142.
So remaining profit is 220-124=96.
From level below 11142 the profit from CE should help you cover the loss of two puts.
If distributed the remaining profit of 96 for 2, it is 48 each.
So finally the break even is 11142-48=11094.

3

Thanks Venu :grinning: