Short Straddle
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Direction |
Neutral |
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Strategy Type |
Income |
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Legs |
Sell 1 ATM Call
Sell 1 ATM Put |
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|
Max Reward |
Premium Received |
|
Max Risk |
Unlimited |
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Time Horizon |
Short term |
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Risk Profile |
Very High |
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Payoff Diagram
Description
The short straddle - a.k.a. sell straddle or naked straddle sale - is a neutral options strategy that involve the simultaneous selling of a put and a call of the same underlying stock, striking price and expiration date.
Steps involved
Suppose XYZ stock is trading at $40 in June. An options trader enters a short straddle by selling a JUL 40 put for $200 and a JUL 40 call for $200. The net credit taken to enter the trade is $400, which is also his maximum possible profit.
Rational
The stock needs to stay in one spot in order to take maximum profit in this trade. You would be looking for stocks that are not pending an announcement, in an industry with no hiccups or adversities.