Strategy

Short Straddle

Type of Strategy

trading

sentiment

neutral

implied volatility

high

example

XYZ at $40.  Sell a 45-DTE $40 Strike Call and 45-DTE $40 Strike Put for $2 each.

boundaries

max loss = undefined     

max profit = $4 ($2+$2) 

Breakeven = $36,$44     (underlying +/- credit recvd)

description

Concurrently sell a call and a put at the same strike price, with the same expiration.

Set-Up

Sell (short) 1 call at strike price X with expiration Z.

Sell (short) 1 put at strike price X with expiration Z.

Note: Strike price selection is generally ATM, although this is not a requirement.

Soi perspective

SOI does not recommend pure short straddles due to unlimited risk to the upside.  Purchasing a small delta call for protection can provide a means to define the upside risk with minimal impact on the strategy profile, providing a near equivalent to the short straddle for the option trader.

Traders should avoid long straddles, as long premium strategies historically provide negative returns.

Traders and investors can use straddles to approximate the expected move of an underlying within a specific time frame.  By modeling an ATM straddle with a specific expiry, calculating the break-even points provides an approximation of expected price movement within the expiration cycle.

Traders generally prefer short strangles to short straddles, although the short straddle occasionally finds use.

Note that short straddles are a part of many other option strategies.

image from www.theoptionsguide.com