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Short Straddle Profile Version / Simplified Version / Comprehensive Version


Purpose Of Short Straddle
1. To Profit From Stagnant Stocks
2. To Play "Banker" In A Long Straddle Transaction
3. To Put Time Decay In Your Favor


Expectation Of Short Straddle
Stagnant


Type Of Spread
Naked Option Selling


How To Use Short Straddle?
Sell To Open the same amount of At The Money (ATM) Call Option And Put Option.

Sell ATM Call + Sell ATM Put 		Short Straddle Risk Graph Learn How To Read This Chart


Profit Potential of Short Straddle :
The Short Straddle reaches maximum profit when both short call and put options expire during expiration. This happens when the underlying asset closes right on the strike price of both legs during expiration.

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Profit Calculation of Short Straddle:
Max. Return = Net Credit
% Return = Net Credit ÷ [(Option Strike Price + Highest Option Bid) - Net Credit]


Risk / Reward of Short Straddle:
Maximum Profit: Limited
Net Credit Received

Maximum Loss: Unlimited

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Break Even Point of Short Straddle:
There are 2 break even points to a short straddle. In this case, a breakeven point is the point from which the position will start to make a loss. One breakeven point if the underlying asset goes up (Upper Breakeven), and one breakeven point if the underlying asset goes down (Lower Breakeven).

Upper BEP: Strike Price + Net Credit
Lower BEP: Strike Price - Net Credit


Advantages Of Short Straddle :

  • Able to profit when stock do not move.

  • An initial credit is received on the transaction so the investor does not have to put up any money to enter into the position.


    Disadvantages Of Short Straddle:

  • There will be more commissions involved than simply writing naked call or put options.

  • The loss potential is unlimited. That means that you can lose as much money as the underlying stock can move.

  • The profit potential is limited to the net credit recieved and nothing more.

  • The margin requirements for this option strategy are fairly high. Your broker may require you to cover both options as if they were two Naked Options, or they may require a cash value of the Option Strike Price plus the highest bid of the call or the put.


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