Short Straddle - Short Calls and Puts with the SAME Strike Price and Expiration Date.
Strategies...
- Sell ATM Call and Put with one month or less to expiration.
- Looking for NO movement in the stock.
- Time decay is helpful to short straddle.
- Uncapped downside risk, capped profit.
Example...
Best Buy Co., Inc.(NYSE:BBY) is traded at $18.30 on June 1, 2012. To short a straddle,
- Sell June 16, 2012 $18 Call at $0.70.
- Sell June 16, 2012 $18 Put at $0.55.
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| Short Straddle |
Advantages...
- Profit from sideways movement of stock.
- Receive options premium immediately
Disadvantages...
- High-risk strategy and unlimited loss.
- Only suitable for advanced options trader
Maximum Profit: $0.70 + $0.55 = $1.25
(Call Premium + Put Premium)
Maximum Loss: Uncapped
Breakeven Up: $18.00 + $1.25 = $19.25
(Strike Price + Premium gain)
Breakeven Down : $18.00 - $1.25 = $16.75
(Strike Price - Premium gain)
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