Short Straddle Option Strategy - The Options Playbook

4/8/23, 6:55 PM Short Straddle Option Strategy - The Options Playbook
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The Options Strategies » Short Straddle
Short Straddle
The Setup
Sell a call, strike price A
Sell a put, strike price A
Generally, the stock price will be at
strike A
NOTE: Both options have the same expiration

month.
Who Should Run It

The Strategy All-Stars only
NOTE: This strategy is only suited for the most

A short straddle gives you the obligation to sell the stock at
advanced traders and not for the faint of heart.
strike price A and the obligation to buy the stock at strike price
Short straddles are mainly for market
A if the options are assigned.
professionals who watch their account full-
By selling two options, you significantly increase the income time. In other words, this is not a trade you
you would have achieved from selling a put or a call alone. But manage from the golf course.
that comes at a cost. You have unlimited risk on the upside and
substantial downside risk. When to Run It
https://www.optionsplaybook.com/option-strategies/short-straddle/ 1/7
Advanced traders might run this strategy to take advantage of a You’re expecting minimal movement on the
possible decrease in implied volatility. If implied volatility is stock. (In fact, you should be darn certain that
abnormally high for no apparent reason, the call and put may be the stock will stick close to strike A.)
overvalued. After the sale, the idea is to wait for volatility to
drop and close the position at a profit.
Break-even at Expiration
Options Guy's Tip There are two break-even points:
Strike A minus the net credit received.

Strike A plus the net credit received.
Even if you’re willing to accept high risk, you may wish
to consider a short strangle since its sweet spot is wider than a
short straddle’s. The Sweet Spot
You want the stock exactly at strike A at
expiration, so the options expire worthless.
However, that’s extremely difficult to predict.
Good luck with that.
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.
If the stock goes down, your losses may be

substantial but limited to the strike price minus
net credit received for selling the straddle.
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.
NOTE: 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. So don’t forget to multiply by
the total number of units when you’re doing

the math.
As Time Goes By
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.
Implied Volatility
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.
Check your strategy with Ally Invest tools

Use the Profit + Loss Calculator to establish break-even points, evaluate how your strategy might
change as expiration approaches, and analyze the Option Greeks.
Examine the stock’s Volatility Charts. If you’re doing this as a volatility strategy, you want to see
implied volatility abnormally high compared with historic volatility.
Don’t have an Ally Invest account? Open one today!
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4/8/23, 6:55 PM Short Straddle Option Strategy - The Options Playbook

The Options Strategies » Short Straddle

NOTE: Both options have the same expiration

Who Should Run It

NOTE: This strategy is only suited for the most

Strike A minus the net credit received.

Maximum Potential Profit

Maximum Potential Loss

If the stock goes down, your losses may be

Ally Invest Margin

NOTE: The net credit received from

After this position is established, an ongoing

the total number of units when you’re doing

An increase in implied volatility also suggests

Check your strategy with Ally Invest tools

Don’t have an Ally Invest account? Open one today!

Back to the top

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