uTrade Algos

What is a short straddle?

A short straddle is a complex options trading strategy involving the concurrent sale of a call option and a put option with identical strike prices and expiration dates. Unlike a standard straddle, where the investor purchases both call and put options, the short straddle strategy is executed by selling both options upfront. This strategy generates immediate income in the form of premiums collected from selling the call and put options.

Traders employ a short straddle when they anticipate minimal price movement or stability in the underlying asset. Ideally, they expect the market to remain relatively stagnant, causing the value of both options (call and put) to decrease over time. In this scenario, the options would expire worthless, allowing the seller to keep the premiums collected from the initial sale as profit.

However, it’s crucial to note that a short straddle carries substantial risk. If the market experiences significant price fluctuations, the seller may face unlimited losses. This strategy has the potential for substantial risk if the underlying asset’s price significantly increases or decreases beyond the strike prices, resulting in losses that surpass the premiums collected. Traders should carefully assess market conditions and risk tolerance before employing a short straddle strategy.

To find out what is a long straddle click here. What is a long straddle?