21st May 2022

What is a Short straddle Strategy? How to use a short straddle?

In a short straddle strategy, an uncovered call (short call) and an uncovered put (short put) options are sold at the same strike price, same expiry and same underlying asset. The short straddle strategy is also known as the sell straddle strategy. 

This strategy is opposite to the long straddle strategy. It works when the market is least volatile. It is used in situations where we expect sideways to no movement in either direction.

The suitable time to sell both call/put options is when they are overvalued wherever the spot price of security moves. 

Short Straddle – Risk and margin required

It includes unlimited risk, as one may lose up to the entire value in case the market moves in either direction. The further the market moves away from breakeven the higher the loss. The profit will be limited to the premium received on both options. The margin requirement is the short call or short put requirement, plus the premium received from the other side.

Short straddle – Breakeven point

The Breakeven points for short straddle strategy are

  • The upper breakeven point  for short straddle = Short Call option ( strike price + Net premium received)
  • The lower breakeven point  for short straddle = Short Put option ( strike price – Net premium received)

How to make a short straddle Strategy in an intraday screener?

Using the Options strategy builder in the intraday screener website, you can easily build an option strategy for a short straddle strategy. 

Step 1: You just need to select the indices and expiry date (sell both call and put options) and click on add/edit to get started.

short straddle

Step 2: Click on the short straddle strategy below. 

short straddle

Step 3: You will get detailed information on the option strategy like Premium, Max profit at expiry, Max losses at expiry, Breakeven at expiry and a short straddle graph.

short straddle

When to trade short straddle strategy?

A short straddle option strategy works on assuming the price can be range-bound or not moving. The IV for a short straddle strategy is medium to high but the further move expected is range-bound.

A trader should enter at-the-money options or at least close to it at the time of selling. Short straddles work best when Theta Decay is high, so prefer weekly expiry. 

Short Straddle – Advantages

  • You can gain profits even when the market is not volatile.
  • Suitable for risk-prone traders.

Short Straddle – Disadvantages

  • The losses and risks involved are infinite.
  • Profit gained and premiums received are equal.

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