Example:

In this example, DJX is at 102.00 (DJIASM at 10,200).

Outlook:

You expect considerable market volatility (>10%) to hit by February. You want to keep initial costs down, and are looking for an inexpensive straddle.

Possible Strategy: Strangle

Buy 1 DJX February 105 call at $1.
Buy 1 DJX February 95 put at $1.50.
Debit of 2.50 or $250.00.

*All values shown are at the time of expiration.

At Expiration (19/02/05)

* Max Gain: Unlimited through expiration
** Break-even: 2 BE points DJX at 107.50 (+5.39%) or at 92.50 (-9.31%)
*** Unchanged: Loss of $250.00 (initial investment)
**** Max Loss: $250.00 (initial investment)

In Short:

Maximum risk equal to initial option premium paid of$250.00, plus commissions. Unlimited upside profit potential if DJX rises above 107.50 (+5.39%) by February expiration. Also significant downside profit potential if DJX falls below 92.50 (-9.31%) by February expiration.