Straddle breakevens and which stock moves more

Question

Two stocks report earnings tonight. Stock A trades at $\$ 50 $with an at-the-money weekly straddle at$ $2.50 $. Stock B trades at$ $200 $with an at-the-money weekly straddle at$ $6$.

Which stock is the market pricing to move more? Where are each straddle's breakevens, and what does the buyer need to profit?

Accepted Answer

Compare in percent, not dollars. The straddle is the expected absolute move in dollars, so scale by the stock price to compare: 	ext{A: } \frac{2.50}{50} = 5\%, \qquad 	ext{B: } \frac{6}{200} = 3\%. Even though B's straddle costs more in dollars, the market is pricing a larger move for A (5\% vs 3\%). A is the higher-implied-vol name. Breakevens. A long straddle profits only if the stock finishes beyond the strike by more than the premium paid, so the breakevens sit one straddle-width on each side of the strike: - Stock A: 50 \pm 2.50 \Rightarrow breakevens at \47.50 and \52.50. - Stock B: …

Straddle breakevens and which stock moves more

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