Straddle - Short Straddle

Short Straddle

A short straddle is a non-directional options trading strategy that involves simultaneously selling a put and a call of the same underlying security, strike price and expiration date. The profit is limited to the premiums of the put and call, but it is risky because if the underlying security's price goes very high up or very low down, the potential losses are virtually unlimited, yet it depends on the type of purchase vehicle used (differ in risk %). The deal breaks even if the intrinsic value of the put or the call equals the sum of the premiums of the put and call. This strategy is called "nondirectional" because the short straddle profits when the underlying security changes little in price before the expiration of the straddle. The short straddle can also be classified as a credit spread because the sale of the short straddle results in a credit of the premiums of the put and call.

A short straddle position is highly risky, because the potential loss is limited/unlimited due to the sale of the call and the put options which expose the investor to unlimited losses (on the call) or losses equal to the strike price (on the put), whereas profitability is limited to the premium gained by the initial sale of the options. The Collar is a more conservative "opposite" that limits gains and losses.