The short straddle is a neutral options trading strategy. It is comprised of a short call and a short put, both ATM options . By doing this, traders take positions on both sides of market.
You receive the highest amount of possible credit because you are selling two options, but ATM. But this trade needs a lot more management because one of the leg will become ITM as soon as the stock moves. I would not recommend this trade for part time option traders
Trade
-Sell 1 ATM call
-Sell 1 ATM put
Trade Example
Stock XYZ is trading at $28.10 a share.
– Sell 28
– Sell 28 put for $0.92
– The net credit received for this trade is $2.12
Profit & Loss Diagram
Short Straddle Summary
| Break Even Price | Higher side : Strike price of short call + Premium Lower Side : Strike price of short put – Premium |
| Maximum Profit | Limited to the amount of initial premium received |
|---|---|
| Maximum Profit Scenario | Stock stays at the ATM strike price |
| Maximum Loss | Unknown |
| Loss Scenario | Stock is higher than the Short Call Strike + Premium Stock is lower than the Short Put – Premium |
| Why Trade | If you do not have any directional bias in the market , and can spend time in managing the trade |
| When to Open | Stock Outlook : Neutral Volatility : High so you can get higher net credit |
| Which strikes to choose? | There isn’t much option on this. You have to choose the ATM strike |
| When to Close | When the trade is making 25% of the max profit potential. |
| Legs | 2 legs |
| Passage of time | Positive impact on trade. With passage of time, the value of this option decreases |
| Increase in volatility | Negative impact on trade. With increase in volatility, the value of option increases |