Short Straddle

Short straddle is the option strategy based on volatility, which lies in the simultaneous selling call and put options on one asset with same strikes.

Short straddle has 2 break-even points and the buyer expects the stock price to stay in market flats and triangles that is in the narrow price range during required period of time, that is he is looking forward to little volatility in the underlying asset during the option existence. This strategy has unlimited risk whereas a profit potential is limited to the premium.

Short Straddle

Suppose, someone executes short straddle by selling the call option for the premium of $14.5 and the put for the premium of $10.5. Suppose, the strike price is $100. The total premium is $25 ($14.5+$10.5). So, break-even point 1 equals $125 ($100+$25) and break-even point 2 is $75 ($100-$25). Thus, an investor makes a profit if the asset stays in the price range of $75-$125 and loses money after breaking through this price area.

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