Short Straddles...

Short Straddle Profit Loss Graph

The short straddle position is created when an investor sells the same number of call and put options at the same strike price and expiration date. This strategy is best used on sideways or stagnant stocks. Unlike the Long Straddle which takes advantage of stock moves in either direction, the short straddle strategy is dependant on the stock price staying at the set strike price of the options at expiration.

Since the investor is selling options there is a net credit achieved once the trade is activated. The maximum profit in the position is equal to the net credit. By selling both a call and a put, there are both an upper break even point and a lower break even point. A profit is realized on the position if the stock stays between the upper and lower break even points.

	Sell calls at a set strike price and expiration date.
	Sell the same number of puts at the same strike price and expiration date.
	The max profit is the net credit (total premium received).
	The position has both an upper break even and a lower break even.
	Profit is realized if the stock stays between the upper and lower break even points.
	The maximum risk is infinite in either direction (infinite to 0 on the put side/decline.)

Calculations for Short Straddles are:

Upper Break Even =	Strike Price + Net Credit
Lower Break Even =	Strike Price - Net Credit
Probability Sum =	(Prob. Above Upper Break Even) + (Prob. Below Lower Break Even) (Reflects Probability that the spread will fail. Look for a lower Probability Sum)
Max Profit =	Net Credit = Premium received.

Where...

Net Credit =	Premium of Sold Call + Premium of Sold Put
% Return =	Net Credit ÷ (Option Strike Price + Highest Option Bid) - Net Credit
Example:	XYZ at $48.35 per share.
	Sell the FEB 50 Call for $1.20
	Sell the FEB 50 Put for $2.70
Max. Profit =	Net Credit = $1.20 + $2.70 = $3.90
Upper Break Even =	Strike + Net Credit = $50.00 + $3.90 = $53.90
Lower Break Even =	Strike - Net Credit = $50.00 - $3.90 = $46.10
% Return =	Net Credit ÷ (Option Strike Price + Highest Option Bid) - Net Credit
% Return =	$3.90 ÷ (50 + $2.70) - $3.90 = 8%

Advantages of the Short Straddle Option Strategy:

	If the stock remains at the original stock price, both of the options will expire worthless and the investor will keep both premiums (maximum profit)
	If the stock price remains below the strike price but above the lower break even point the investor will still realize a profit.
	If the stock price remains above the strike price but below the upper break even point the investor will still realize a profit.
	An initial credit is received on the transaction so the investor does not have to put up any money to enter into the position.
	No stock is actually owned with the short straddle strategy (uncovered position).

Cautions with the Short Straddle Option Strategy:

	The investor can take a loss if the stock swings quickly in one direction or the other due to unforseen events.
	The risk/max loss is infinite because of the obligation to buy or sell shares of stock that are not owned.
	Because of this risk, the margin requirements for this strategy are fairly high. Your broker may require you to cover both options as if they were two Naked Options, or they may require a cash value of the Option Strike Price plus the highest bid of the call or the put.

Research Tips:

	If you are looking to short options but want to allow for more movement in the stock: Short Strangle .
	If you were looking to go long options to take advantage of stock fluctuation: Long Straddle.