Short straddle is the option strategy based on profiting from extremely high volatility. It’s essence lies in the simultaneous selling call and put options on one asset with same strikes.
Short straddle has 2 break-even points – above and below the entry price. The potential profit for the buyer is limited to premiums of the options sold and the potential loss is unlimited, that’s why this strategy is not recommended for beginners.
Suppose, we open the short straddle by selling the call option for $14.5 and the put option for $10.5. Suppose, the strike price is $100. The total premium is ($14,5 + $10,5)*100 = $2500. So, the break-even point # 1 is $125 ($100 + $25) and break-even point # 2 is $75 ($100 – $25). In this case, we’ll make profit if the asset price stays in the price range of $75 – $125 and we’ll lose money after breaking through this price area.