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This page explains short straddle profit and loss at expiration and the calculation of its break-even points. Short straddle is non-directional short volatility strategy. Short straddle has limited potential profit , equal to the premium received for selling both legs, and unlimited risk. We will use the same options that we have used in the long straddle example — the only difference is that now we are selling them rather than buying. A short straddle position is the exact other side of a long straddle trade.
Like with a long straddle, the strike closest to the current underlying price is typically selected, unless the trader has a directional bias. Because we are short both options, there is no way to earn more than the premium received in the beginning — it can only get worse. The objective of a short straddle trade is to defend the premium received.
Because the call and the put have the same strike price, as soon as the underlying price moves a cent away from that strike, one of the options will have positive intrinsic value — which is our loss, as we are short.
The best case scenario is that underlying price ends up exactly at the strike price at expiration. Maximum profit from a short straddle equals premium received. It applies only when underlying price ends up exactly at the strike price at expiration.
If underlying price ends up above the strike at expiration, the short call is in the money and total profit declines as underlying price rises. The same logic applies when underlying price ends up below the strike price, only the contributions of the two legs are reversed.
The call is out of the money and expires worthless. As a result, maximum possible loss below the strike is limited, although usually very large. There are two break-even points — one above the strike and one below. Their distance from the strike is the same and equal to premium received for both options. If you have seen the long straddle payoff tutorial , you can also see the break-even points are exactly the same. This is not surprising, as long straddle and short straddle are just the other side of one another.
Below you can find a short straddle payoff diagram blue line and contributions of individual legs — the short call red and the short put green. We already know that short straddle is the other side of long straddle , which is a non-directional long volatility strategy. Short straddle payoff is similar to short strangle. The difference is that in a short strangle the call strike is higher than the put strike and as a result maximum profit applies for any underlying price between the two strikes.
Other things being equal, maximum profit of a short strangle is smaller than maximum profit of a short straddle, because the options you sell are typically out of the money. Nevertheless, thanks to the gap between strikes, the window of profit between the two break-even points is actually wider with a short strangle, making it a slightly more conservative trade than a short straddle.
With the above said, both short straddle and short strangle are quite risky trades. When not carefully managed they can result in large losses if underlying price makes a big move. To limit the potential losses, you can buy an out of the money call and an out of the money put as hedging. This will reduce net premium received and thereby maximum profit, but it will also protect you from large moves. This strategy short straddle hedged with a lower strike long put and a higher strike long call is known as iron butterfly.
In the same way, iron condor is a hedged version of short strangle. If you don't agree with any part of this Agreement, please leave the website now. All information is for educational purposes only and may be inaccurate, incomplete, outdated or plain wrong.
Macroption is not liable for any damages resulting from using the content. No financial, investment or trading advice is given at any time.
Home Calculators Tutorials About Contact. Tutorial 1 Tutorial 2 Tutorial 3 Tutorial 4. Short Straddle Basic Characteristics Short straddle is non-directional short volatility strategy. We will illustrate the profit and loss profile and the various scenarios on an example. Short Straddle Example We will use the same options that we have used in the long straddle example — the only difference is that now we are selling them rather than buying.
If Underlying Goes Up If underlying price ends up above the strike at expiration, the short call is in the money and total profit declines as underlying price rises.
Short Straddle Payoff Summary Below you can find a short straddle payoff diagram blue line and contributions of individual legs — the short call red and the short put green. Similar Option Strategies We already know that short straddle is the other side of long straddle , which is a non-directional long volatility strategy.