Investment Type: Debit
Strike Prices: same strike prices for both legs
Expiration Month: current month for both sold legs
Composition: Buy Stock + Sell put + Sell call
| Covered Short Straddle Profile Chart | ||
|
Covered Short Straddle is “yield-enhancing” version of Covered Call. It increases the yield and lower breakeven point. However, the risk associated also double from Covered Call. It’s true that it’s less likely to happen within a month, but once it breaks below our breakeven point, we can lose our hard-earned profits twice faster.
It is crucial to define a clear and strong support line if we are to use this strategy. The breakeven point should be higher than the support line.
| Example | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Entry:
Investment @ Entry = (Stock Price x 100 Shares) + (Premium of Call Sold Leg x No of Contracts x 100) + (Premium of Put Sold Leg x No of Contracts x 100) = $3,400 + ($80) + ($170) = $3,150
Breakeven Point = Stock Price – (total premium received on the Sold Legs) = $34.00 – ($1.70 + $0.80) = $34.00 - $2.50 = $31.50
Exit: Best Case Scenario:
Profit @ Exit = (Stock Price x 100 Shares) + (Premium of Call Sold Leg x No of Contracts x 100) + (Premium of Put Sold Leg x No of Contracts x 100) – Investment @ Entry = $3,500 + $0 + $0 - $3,150 = $350
Return of Investment = Profit @ Exit / Investment @ Entry = 11%
Worst Case Scenario : Unlimited Loss
|