Short Straddle

A Short Straddle is the opposite of Long Straddle. It is a strategy to be adopted when the investor feels the market will not show much movement. He sells a Call and a Put on the same stock / index for the same maturity and strike price. It creates a net income for the investor. If the stock / index does not move much in either direction, the investor retains the Premium as neither the Call nor the Put will be exercised. However, incase the stock / index moves in either direction, up or down significantly, the investor’s losses can be significant. So this is a risky strategy and should be carefully adopted and only when the expected volatility in the market is limited. If the stock / index value stays close to the strike price on expiry of the contracts, maximum gain, which is the Premium received is made.

When to Use: The investor thinks that the underlying stock / index will experience very little volatility in the near term.

Risk: Unlimited

Reward: Limited to the premium received

Breakeven : · Upper Breakeven Point = Strike Price of Short Call + Net Premium Received

Lower Breakeven Point = Strike Price of Short Put – Net Premium Received

Example

Suppose Nifty is at 4450 on 27th April. An investor, Mr. A, enters into a short straddle by selling a May Rs 4500 Nifty Put for Rs. 85 and a May Rs. 4500 Nifty Call for Rs. 122. The net credit received is Rs. 207, which is also his maximum possible profit.

Short Straddle
Strategy : Sell OTM Put + Sell OTM Call
Nifty index Current Value 4450
Call and Put Strike Price (Rs.) 4500
Mr. A receives Total Premium 207
(Call + Put) (Rs.)
Break Even Point 4707(U)
(Rs.)*
(Rs.)* 4293(L)
* From buyer’s point of view

To view Practical examples of Short Straddle Option Trading Strategies

Courtesy – NSE India