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Short Straddle Option Strategy

Short Straddle Option Strategy will allow traders to make a profit from the lack of movement in the underlying asset than placing directional bets hoping for a big move in higher or lower. The premiums are collected when the trade is opened with the goal of both the put and call expires worthless. The maximum profit is the amount of the premium collected by writing the options. The traders who are an advance run strategy to take advantage of a decrease in implied volatility. The goal of the strategy is to wait for volatility to drop and close the position for a profit without waiting. It passes without movement in the underlying asset that will benefit from time erosion.

The volatility is the main factor and affects a trader profit if it goes up. They are used by advanced traders when the implied volatility goes high for no reason and call, put premium may be overvalued. After selling straddle we wait for implied volatility to drop and close the position at a profit. They will lead to a loss in case of implied volatility that rises if the stock price remains at the same level.

Construction

It is implemented by selling at the money call and putting the option of the same underlying security with the same expiry. It is exposed to unlimited risk and advisable not to carry overnight positions.

Example

If a trader writes a straddle with a strike price of $25 for underlying stock trading near $25 per share, and if the stock price jumps up to $50.The trader sells the stock for $25 if the investor doesn’t hold the underlying stock. He is forced to buy it on the market for $50 and sell it for $25, a loss of $25 minus the premium received after opening trade.

Profit/Loss

The maximum gain is the same as the net premium received. The maximum loss is unlimited as the stock continues to move against the trader in either direction.

Breakeven

Hereby adding the premium strike price on the downside and subtracting premium from strike price the breakeven is calculated.

Conclusion

The strategy is neutral that makes sense when there is no announcement scheduled. Here trader wants the stock to set stable with less price movement duration. Here they sell that receive two premiums which require the stock twice before they start to lose. The price is for the market except the stock to move it from the current price by expiration. The traders need to be smart and have good timing while executing the trade.