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Short Straddle Option Strategy

Short Straddle Option Strategy

What is Short Straddle Option Strategy?

  • Short Straddle is just opposite Buy Straddle and is a range bound Strategy that aims to make money wherein you don't expect underlying to show any significant movement or expecting fall in volatility. Short Straddle strategy demands underlying not to move significantly i.e., this is non direction strategy. In other words, if the underlying fails to show a significant move and closes at sold strike we’ll keep all the premium as both options expire worthless.

When to Execute?

  • Short Straddle is a non-directional strategy, but trade must also be bearish on volatility. It is advised that short Straddle should be implemented when there is no event in near term, and volatility is on the higher and expected to decrease or can be implemented on low Volatile underlying. Short Straddle generally Implemented by options traders on expiry day more specifically weekly expiries.

What is the Trade?

  • Under Short Strangle we buy Sell one-one lot of At-the-Money (OTM) Call and Put for the same underlying , same strike price and same expiry.

Break-Even Point

  • Short Strangle will have 2 break-even points. The breakeven points can be calculated as given below. Lower Breakeven = Strike Price - Net Premium Received. Upper Breakeven = Strike Price + Net Premium Received.

What will be maximum profit?

  • Maximum Profit is only at sold strike price i.e., ATM strike.

What will be your maximum loss?

  • It is a Net credit strategy as we have sold both Call & Put. Maximum Loss is undefined If market shows the significant move and stays in above upper and lower breakeven.

What are the advantages?

  • Profit from Range bound stock. 1. Profit from range bound stock. 2. Comparatively high yielding income strategy as compared to Short Strangle and Short Guts. 3. Provides less range of profitability. 4. Time decay is beneficial.

What are the disadvantages?

  • Uncapped Risk on either side. Hedging cost would be high if stock gives any directional movement.

Example of Short Straddle:

  • Nifty future price is 15500. Short Straddle can be devised by selling one lot of 15500 PE @ 80 and one lot of 15500 CE at Rs. 90. Net Premium Received = Rs.170. Undefined loss potential if stock moves above or below the upper or lower breakeven i.e., 15670 and 15330. Max Profit if underlying closes at 15500.