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Case Study Closed: Long Straddle

by Lumilog on January 18, 2014

Did you think I’d forgotten?!

Back in July 2012, Nokia was at about $1.75 per share. I’d researched the company a few months prior when it was at about $8.50 to determine whether it was a long or a short, picked long, and gotten burned.

I told you that what I should have done instead was a long straddle. It appeared to be the perfect way to invest in a company in a do-or-die scenario. You make money regardless of whether they do or die. The only way you lose money is if they amble along in a meh purgatory and the stock price doesn’t really change.

Let’s review what the math was to put on such a straddle on the day I posted:

* NOK at $1.75
* Assume 50/50 whether turns around or goes bankrupt
* Assume if turns around, stock doubles, otherwise goes to $0
* Jan 18 2014 call with $2.00 strike at $0.61
* Jan 18 2014 put with $1.50 strike at $0.56
* We make 20% annualized if goes to $0
* We make 30% annualized if it doubles
* So, 25% expected annualized return

What actually happened? Read it and weep (if, like me, you didn’t put any money behind this idea).

nok_long_straddle_expiration

The put expires worthless today but the call is worth $7.79 – $2.00 = $5.79.

$5.79 made vs. $1.17 invested = an almost 400% return over 1.5 yrs or ~200% annualized.

Time to start spreadsheeting potential payoffs with Blackberry…

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