Short Straddle

How Does Short Straddle Work in Options Trading?

Learn How To Read This Chart

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

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.

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

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 :

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.

Don't Know If This Is The Right Option Strategy For You? Try our Option Strategy Selector!

Javascript Tree Menu