What is terminal P/L at 105 for the 100 straddle costing 8.40?
Reveal the worked answer
−340 for one standard call-plus-put pair before costs.
Five intrinsic minus 8.40 paid.
Core Options · OPT-14 · Core
Earnings: direction versus volatility
What move must the paid premium overcome?
What you will learn and prerequisites
- Explain the mechanism in the lesson question.
- Reproduce the worked comparison and recognize its failure case.
Read first: Read a contract and its premium, Rights, obligations and expiration, Defined payoff risk is not margin, Read the whole multi-leg ticket
An earnings trade contains an event and a volatility-price comparison. Expecting movement is insufficient if the options already charge for more movement. Uncertainty often reprices after the release, but no fixed IV collapse is guaranteed.
A directional and a long-volatility thesis should be written separately.
Understand the mechanism
A long straddle buys both directions but pays both premiums. A short structure receives premium in exchange for adverse tail exposure. Spreads change the payoff and cap some outcomes, but do not remove gap, liquidity or assignment risks.
Before expiry, value depends on remaining time and the new IV surface as well as intrinsic.
Walk through the process
Compare a plausible event outcome with the ticket's cost and breakevens. Include the disappointing-move and large-gap branches. Avoid labeling high IV automatically overpriced.
Know what information is already expected and when the event falls relative to the chosen expiry.
Contract and decision boundary
Terminal examples use simultaneous intrinsic realization of all stated legs, before unspecified costs. Actual American exercise, assignment, early liquidation and broker handling can create different interim cash needs. These fictional comparisons are education, not orders or personalized investment advice.
A worked example
A fictional same-strike 100 straddle costs 8.40 total. If it reaches expiry at 105, only the call has five points intrinsic; the combined loss is 3.40 per unit, or 340 per standard pair before fees.
The stock moved, but not far enough for this terminal purchase price. The graph is exact terminal P/L; it does not pretend to price the immediate post-earnings option while time remains.
Earnings: direction versus volatility—worked comparison
Vertical: Straddle terminal P/L (USD)
Horizontal: Underlying at common expiry (USD)
1. Fictional example
Read the graph as a data table
| Underlying at common expiry (USD) | Fictional example |
|---|---|
| 85 | 660 |
| 86 | 560 |
| 87 | 460 |
| 88 | 360 |
| 89 | 260 |
| 90 | 160 |
| 91 | 60 |
| 92 | -40 |
| 93 | -140 |
| 94 | -240 |
| 95 | -340 |
| 96 | -440 |
| 97 | -540 |
| 98 | -640 |
| 99 | -740 |
| 100 | -840 |
| 101 | -740 |
| 102 | -640 |
| 103 | -540 |
| 104 | -440 |
| 105 | -340 |
| 106 | -240 |
| 107 | -140 |
| 108 | -40 |
| 109 | 60 |
| 110 | 160 |
| 111 | 260 |
| 112 | 360 |
| 113 | 460 |
| 114 | 560 |
| 115 | 660 |
What would invalidate the reading?
A trader predicts the sign correctly but underestimates paid premium or IV repricing. A seller wins often but suffers a gap beyond collected premium.
Check your understanding
Try the question before revealing its answer. These are reading checks, not trading certification or a site completion record.
What is the critical failure to avoid?
Reveal the worked answer
A trader predicts the sign correctly but underestimates paid premium or IV repricing. A seller wins often but suffers a gap beyond collected premium.
Explain this risk before treating the example as a decision rule. A correct calculation does not guarantee a favorable market outcome.
Return to the question: What move must the paid premium overcome? State the observed facts, the assumptions and the failure condition separately.
Sources, assumptions and downloadable script
External references support definitions and conventions. Worked scenarios and prose are original. No current quotes or dealer inventory are claimed.
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