15 lines
1005 B
Plaintext
15 lines
1005 B
Plaintext
Short Straddle
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Definition : Selling one call and one put in the same option class, in the
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same expiration cycle, and with the same strike price.
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Just as buying a straddle is a pure way to buy volatility, selling a straddle
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is a way to short it. When a trader’s forecast calls for lower implied and
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realized volatility, a straddle generates the highest returns of all volatility-
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selling strategies. Of course, with high reward necessarily comes high risk.
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A short straddle is one of the riskiest positions to trade.
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Let’s look at a one-month 70-strike straddle sold at 4.25.
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The risk is easily represented graphically by means of a P&(L) diagram.
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Exhibit 15.5 shows the risk and reward of this short straddle.
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EXHIBIT 15.5 Short straddle P&(L) at initiation and expiration.
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If the straddle is held until expiration and the underlying is trading below
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the strike price, the short put is in-the-money (ITM). The lower the stock,
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the greater the loss on the +1.00 delta from the put. The trade as a whole |