Short Straddle (Sell Straddle)

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The subject line of the email you send will be "Fidelity. A short straddle consists of one short call and one short put. Both options have the same underlying stock, the same strike price and the same expiration date. A short straddle is established for a net credit or net receipt and profits if the underlying stock trades in a narrow range between the break-even points. Profit potential is limited to the total premiums received less commissions.

Potential loss is unlimited if the stock price rises and options strategies short straddle if the stock price falls. The maximum profit is earned if the short straddle is held to expiration, the stock price closes exactly at the strike price and both options expire worthless. Potential loss is unlimited on the upside, because the stock price can rise indefinitely.

On the downside, potential loss is substantial, because the stock price can fall to zero. A short straddle profits when the price of the underlying stock trades in a narrow range near the strike price. A short — or sold — straddle is the strategy of choice when the forecast is for neutral, or range-bound, price action. Straddles are often sold between earnings reports and other publicized announcements that have the potential to cause sharp stock price fluctuations.

It is important to remember that the prices of calls and puts — and therefore the prices of straddles — contain the consensus opinion of options market participants as to how much the stock price will move prior to expiration.

This means that selling a straddle, like all trading decisions, options strategies short straddle subjective and requires good timing for both options strategies short straddle sell to open decision and the buy to close decision. When the stock price is at or near the strike price of the straddle, the positive delta of the call and negative delta of the put very nearly offset each other. Thus, for small changes in stock price near the strike price, the price of a straddle does not change very much.

This happens because, as the stock price rises, the short call rises in price more and loses more than the short put makes by falling in price. Also, as the stock price falls, the short put rises in price more and loses more than the call makes by falling in price.

Negative gamma means that the delta of a position changes in the opposite direction as the change in price of the underlying stock. As the stock price rises, the net delta of a straddle becomes more and more negative, because the delta of the short call becomes more and more negative and the delta of the short put goes to zero.

Similarly, as the stock price falls, the net delta of a straddle becomes more and more positive, because the delta of the short put becomes more and more positive and the delta of the short call goes to zero. Volatility is a measure of how much a stock price fluctuates in percentage terms, and volatility is a factor in option prices.

As volatility rises, option prices — and straddle prices — tend to rise if other factors such as stock price and time to expiration remain constant. Therefore, when volatility increases, short straddles increase options strategies short straddle price and lose money.

When volatility falls, short straddles decrease in price and make money. This is known as time erosion, or time decay. Since short straddles consist of two short options, the sensitivity to time erosion is higher than for single-option positions.

Short straddles tend to make options strategies short straddle rapidly as time passes and the stock price does not change. Stock options in the United States can be exercised on any business day, and the holder of a short stock option position has no control over when they will be required to fulfill the obligation.

Therefore, the risk of early assignment is a real risk that must be considered when entering into positions involving short options.

Both the short call and the short put in a short straddle have early assignment risk. Early assignment of stock options is generally related to dividends. Short calls that are assigned early are generally assigned on the day before the ex-dividend date. In-the-money calls whose time value is less than the dividend have a high likelihood of being assigned. Therefore, if the stock price is above the strike price of the short straddle, an assessment must be made if early assignment is likely.

If assignment is deemed likely, and if a short stock position is not wanted, then appropriate action must be taken before assignment occurs either buying the short call and options strategies short straddle the short put open, or closing the entire straddle. Short puts that are assigned early are generally assigned on the ex-dividend date. In-the-money puts, whose time value is less than the dividend, have a high likelihood of being assigned. Therefore, if the stock price is below the strike price of the short straddle, an assessment must be made if early assignment is likely.

If assignment is deemed likely and if a long stock position is not wanted, then appropriate action must be taken before assignment occurs either buying the short put and keeping the short call open, or closing the entire straddle. If early assignment of a stock option does occur, then stock is purchased short put or sold short call. If no offsetting stock position exists, then options strategies short straddle stock position is created. If the stock position is not wanted, it can be closed in the marketplace by taking appropriate action selling or buying.

Note, however, that the date of the closing stock transaction will be one day later than the date of the opening stock transaction from assignment. This one-day difference will result in additional fees, including interest charges and commissions. Assignment of a short option might also trigger a options strategies short straddle call if there is not sufficient account equity to support the stock position. There are three possible outcomes at expiration. The stock price can be at the strike price of a short straddle, above it or below it.

If the stock price is at the strike price of a short straddle at expiration, then both the call and the put expire worthless and no stock position is created. If the stock price is above the options strategies short straddle price at expiration, the put expires worthless, the short call options strategies short straddle assigned, stock is sold at the strike price and a short stock position is created.

If a short stock position is not wanted, the call must be closed purchased prior options strategies short straddle expiration. If the stock price is below the strike price at expiration, the call expires worthless, the short put is assigned, stock is purchased at the strike price and a long stock position is created.

If a long stock position is not wanted, the put must be closed purchased prior to expiration. If the holder of a short straddle wants to avoid having a stock position, the short straddle must be closed purchased prior to expiration. Short straddles involve selling a call and put with the same strike price. For example, sell a Call and sell a Put.

Short strangles, however, involve selling a call with a higher strike price and selling a put with a lower strike price. For example, sell a Call and sell a 95 Put. There is one advantage and three disadvantages of a short straddle. The options strategies short straddle of a short straddle is that the premium received and maximum profit potential of one straddle one call and one put is greater than for one strangle.

The first disadvantage is that the breakeven points are closer together for a straddle than for a comparable strangle. Second, there is a smaller chance that a straddle will make its maximum profit potential if it is held to expiration. Third, short straddles are less sensitive to time options strategies short straddle than short strangles. Thus, when there is little or no stock price movement, a short straddle will experience a lower percentage profit over a options strategies short straddle time period than a options strategies short straddle strangle.

The short strangle three advantages and one disadvantage. The first advantage is that the breakeven points for a short strangle are further apart than for a comparable straddle. Third, strangles are more sensitive to time decay than options strategies short straddle straddles. Thus, when there is little or no stock price movement, a short strangle will experience a greater percentage profit over a given time period than a comparable short straddle.

The disadvantage is that the premium received and maximum profit potential for selling one strangle are lower than for one straddle. A covered straddle position is created by buying or owning stock and selling both an at-the-money call and an at-the-money put. A long — or purchased — straddle is a strategy that attempts to profit from a big stock price change either up or down. Reprinted with permission from CBOE.

The statements and opinions expressed in options strategies short straddle article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data. Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk.

Before trading options, please read Characteristics and Risks of Standardized Options. Supporting documentation for any claims, if applicable, will be furnished upon request. Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

Skip to Main Content. Send to Separate multiple options strategies short straddle addresses with commas Options strategies short straddle enter a valid email address.

Your email address Please enter a valid email address. Example of short straddle Sell 1 XYZ call at 3. Long straddle A long — or purchased — straddle is a strategy that attempts to profit from a big stock price change either up or down. Please enter a valid ZIP code.

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A short straddle gives you the obligation to sell the stock at strike price A and the obligation to buy the stock at strike price A if the options are assigned. By selling two options, you significantly increase the income you would have achieved from selling a put or a call alone. But that comes at a cost. You have unlimited risk on the upside and substantial downside risk. Advanced traders might run this strategy to take advantage of a possible decrease in implied volatility.

If implied volatility is abnormally high for no apparent reason, the call and put may be overvalued. After the sale, the idea is to wait for volatility to drop and close the position at a profit.

This strategy is only suited for the most advanced traders and not for the faint of heart. Short straddles are mainly for market professionals who watch their account full-time. In other words, this is not a trade you manage from the golf course. In fact, you should be darn certain that the stock will stick close to strike A. You want the stock exactly at strike A at expiration, so the options expire worthless.

Good luck with that. If the stock goes down, your losses may be substantial but limited to the strike price minus net credit received for selling the straddle. Margin requirement is the short call or short put requirement whichever is great , plus the premium received from the other side.

The net credit received from establishing the short straddle may be applied to the initial margin requirement. After this position is established, an ongoing maintenance margin requirement may apply. That means depending on how the underlying performs, an increase or decrease in the required margin is possible.

Keep in mind this requirement is subject to change and is on a per-unit basis. For this strategy, time decay is your best friend. It works doubly in your favor, eroding the price of both options you sold. That means if you choose to close your position prior to expiration, it will be less expensive to buy it back. After the strategy is established, you really want implied volatility to decrease.

An increase in implied volatility is dangerous because it works doubly against you by increasing the price of both options you sold. That means if you wish to close your position prior to expiration, it will be more expensive to buy back those options.

An increase in implied volatility also suggests an increased possibility of a price swing, whereas you want the stock price to remain stable around strike A. Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options.

Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risks , and may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point.

The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice.

System response and access times may vary due to market conditions, system performance, and other factors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy.

The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns.

The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between. The Strategy A short straddle gives you the obligation to sell the stock at strike price A and the obligation to buy the stock at strike price A if the options are assigned.

Both options have the same expiration month. Break-even at Expiration There are two break-even points: Strike A minus the net credit received. Strike A plus the net credit received. The Sweet Spot You want the stock exactly at strike A at expiration, so the options expire worthless. Maximum Potential Profit Potential profit is limited to the net credit received for selling the call and the put. Maximum Potential Loss If the stock goes up, your losses could be theoretically unlimited.

Ally Invest Margin Requirement Margin requirement is the short call or short put requirement whichever is great , plus the premium received from the other side. As Time Goes By For this strategy, time decay is your best friend. Implied Volatility After the strategy is established, you really want implied volatility to decrease.