What Is a Short Straddle?

A short straddle is an options strategy comprised of selling both a call option and a 澳洲幸运5官方开奖结果体彩网:put option with the same strike price and 澳洲幸运5官方开奖结果体彩网:expiration date. It is used when the trader believes the underlying asset will not move significantly higher or lower over the lives of the options contracts. The maximum profit is the amount of premium collected by writing the options. The potential l꧑osꦫs can be unlimited, so it is typically a strategy for more advanced traders.

Understanding Short Straddles

Short straddles allow traders to profit from the lack of movement in the 澳洲幸运5官方开奖结果体彩网:underlying asset, rather than having to place directional bets hoping for a big move either higher or lower. Premiums are collected when the trade is opened with the goal to let both the put and call expire worthless. However, chances that the underlying asset closes exactly at the strike price at the expiration are low, and that leaves the short straddle owner at risk for 澳洲幸运5官方开奖结果体彩网:assignment. However, as long as the difference between asset price and strike price is less than the premiums collected, the trade🔯r will still make a prof♔it.

Advanced traders might run this strategy to take advantage of a possible decrease in 澳洲幸运5官方开奖结果体彩网:implied volatility. If implied volatility is unusually high without an obvious reason for it being that way, the call and put may be 澳洲幸运5官方开奖结果体彩网:overvalued. In this case, the goal would be to wait ๊for volatility to drop and then close the position for a profit without waiting for expiration.

Example of a Short Straddle

Most of the time, traders use 澳洲幸运5官方开奖结果体彩网:at the money options for straddles.

If a trader writes a straddle with a 澳洲幸运5官方开奖结果体彩网:strike price of $25 for an underlying sꦓtock trading near $25 per share, and the price of the stock jumps up to 𓄧$50, the trader would be obligated to sell the stock for $25. If the investor did not hold the underlying stock, they would be forced to buy it on the market for $50 and sell it for $25 for a loss of $25 minus the premiums received when opening the trade.

There are two potential 澳洲幸运5官方开奖结果体彩网:breakeven points at expiration at the 🐎strike price plus or minus the♏ total premium collected.

For a stock option with a strike price of $60 and a total premium of $7.50, the underlying stock must close between $52.50 and $67.50, not including 澳洲幸运5官方开奖结果体彩网:commissions, for the strategy to break even.

A close below $52.50 or abovꦚe $67.50 will result in a loss.

The Bottom Line

A short straddle is an options trading strategy in which an investor sells both a put and call at the same strike price and expiration date. The trader benefits by collecting the premium as a profit. But the trade is only effective in a market t🉐hat isn't very volatile. If the market moves strongly in either direction, the trader has to cover any losses and give back the premium. As such, it's a strategy that is 澳洲幸运5官方开奖结果体彩网:best employed by experieꦍnced tra♔ders.