What is applied to find breakeven in straddles from the net premiums?

To determine the breakeven point in a straddle, you look at the total net premiums paid for both the call and put options involved in the straddle strategy. A straddle consists of purchasing both a call and a put option with the same strike price and expiration date. The breakeven points can be derived from the premiums paid for these options.

When you apply the total combined net premium to the straddle, you assess how far the underlying asset must move in either direction, up or down, to cover the cost of the options. Therefore, the correct approach involves using the wording of “put down” or “call up,” indicating that the total premium costs must be considered separately when evaluating gains or losses. If the market moves up, you have to consider how much the call needs to gain to cover the premium. Likewise, if the market moves down, the put option must increase in value enough to cover the initial investment.

This consideration ensures that any calculations made reflect the actual cost incurred when implementing the straddle, leading to a proper assessment of the breakeven levels. Hence, understanding this concept helps identify the necessary movement in the underlying asset for a profitable outcome.