Investment Type: Debit
Strike Prices: ATM for both legs
Expiration Month: Current month for both legs (less than 30 days)
Composition: Sell Call + Sell Put
| Short Straddle Profile Chart | ||
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Short Straddle is precisely the opposite of Long Straddle. We Sell ATM Call and Sell ATM Put with the same strike price and expiration date. It is recommended that we choose options with less than one month away from expiration.
If the stock stays within our range until expiration, we will keep our net credit and that’s the maximum profit. If the stock gaps up or gaps down, then make sure that you are ready to face unlimited risks. When we compare the risk reward ratio, it’s obvious to see that it’s very risky to pick options with more than one month away from expiration.
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Entry:
Investment @ Entry = (Premium of Call Leg x No of Contracts x 100 Shares) + (Premium of Put Leg x No of Contracts x 100 Shares) = ($1,600) + ($3,400) = Credit ($5,000)
Breakeven Point Down = Strike Price – Net Credit = $35.00 - $2.50 = $32.50
Exit: Best Case Scenario:
Profit @ Exit = (Premium of Call Leg x No of Contracts x 100 Shares) + (Premium of Put Leg x No of Contracts x 100 Shares) – Investment @ Entry = $0 + $0 – ($5,000) = $5,000
Worst Case Scenario : Unlimited Loss
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