Case Study Closed: Long Straddle

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).


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…