Short Straddle
Definition : Selling one call and one put in the same option class, in the
same expiration cycle, and with the same strike price.
Just as buying a straddle is a pure way to buy volatility, selling a straddle
is a way to short it. When a trader’s forecast calls for lower implied and
realized volatility, a straddle generates the highest returns of all volatility-
selling strategies. Of course, with high reward necessarily comes high risk.
A short straddle is one of the riskiest positions to trade.
Let’s look at a one-month 70-strike straddle sold at 4.25.
The risk is easily represented graphically by means of a P&(L) diagram.
Exhibit 15.5 shows the risk and reward of this short straddle.
EXHIBIT 15.5 Short straddle P&(L) at initiation and expiration.
If the straddle is held until expiration and the underlying is trading below
the strike price, the short put is in-the-money (ITM). The lower the stock,
the greater the loss on the +1.00 delta from the put. The trade as a whole