Short Straddle Strategy

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 call for $1.16
– Sell 28 put for $0.92
– The net credit received for this trade is $2.12

Profit & Loss Diagram

Short Straddle Summary

Break Even PriceHigher side : Strike price of short call + Premium
Lower Side : Strike price of short put – Premium
Maximum ProfitLimited to the amount of initial premium received
Maximum Profit ScenarioStock stays at the ATM strike price
Maximum LossUnknown
Loss ScenarioStock is higher than the Short Call Strike + Premium
Stock is lower than the Short Put – Premium
Why TradeIf you do not have any directional bias in the market , and can spend time in managing the trade
When to OpenStock 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 CloseWhen the trade is making 25% of the max profit potential.
Legs2 legs
Passage of timePositive impact on trade.
With passage of time, the value of this option decreases
Increase in volatilityNegative impact on trade.
With increase in volatility, the value of option increases
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