The Risks with Short Straddles
Looking at an at-expiration diagram or even analyzing the gamma/theta
relationship of a short straddle may sometimes lead to a false sense of
comfort. Sometimes it looks as if short straddles need a pretty big move to
lose a lot of money. So why are they definitely among the riskiest strategies
to trade? That is a matter of perspective.
Option trading is about risk management. Dealing with a proverbial train
wreck every once in a while is part of the game. But the big disasters can
end one’s trading career in an instant. Because of its potential—albeit
sometimes small potential—for a colossal blowup, the short straddle is,
indeed, one of the riskiest positions one can trade. That said, it has a place
in the arsenal of option strategies for speculative traders.