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Options Strategies
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Short Straddle
| Strategies |
Short Straddle |
| Component |
Sell call, sell put of the same strike price/level and month |
| Potential Profit |
- When the stock price/index level is between the two break-even points
- Limited to total premium received
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| Maximum Loss |
- When the stock price/index level is below the lower break-even point, substantial and equals to lower break-even point minus stock price/index level
- When stock price/index level is above the upper break-even point, unlimited and equals to stock price/index level minus upper break-even point
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| Time Value Impact |
Positive |
| Break-even |
- The lower break-even point equals to strike price/level minus total premium received
- The upper break-even point equals to strike price/level plus total premium received
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| Remarks |
Compared with Long Butterfly which has limited losses, Short Straddle has substantial loss on the downside and unlimited loss on the upside. Compared with Short Strangle, Short Straddle has more premium receivable but lower market volatility will result in a loss. |
Example
| Component |
Sell ABC Jun $200 Call, receive $10, and sell ABC Jun $200 Put, receive $15 |
| Net Premium |
Receive $10+$15=$25 |
| Break-even |
- Lower: $200-$25=$175
- Upper: $200+$25=$225
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| Profit when |
Stock price is between $175 and $225 |
| Potential Profit |
$25 |
| Potential Loss |
- When the stock price is below $175, $175 - stock price
- When the stock price is above $225, stock price - $225
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| Time Value Impact |
Positive |
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