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Short Straddle (Sell Straddle or Naked Straddle) Vs Covered Strangle Options Trading Strategy Comparison

Compare Short Straddle (Sell Straddle or Naked Straddle) and Covered Strangle options trading strategies. Find similarities and differences between Short Straddle (Sell Straddle or Naked Straddle) and Covered Strangle strategies. Find the best options trading strategy for your trading needs.

Short Straddle (Sell Straddle or Naked Straddle) Vs Covered Strangle

  Short Straddle (Sell Straddle or Naked Straddle) Covered Strangle
Short Straddle (Sell Straddle or Naked Straddle) Logo Covered Strangle Logo
About Strategy The Short Straddle (or Sell Straddle or naked Straddle) is a neutral options strategy. This strategy involves simultaneously selling a call and a put option of the same underlying asset, same strike price and same expire date. A Short Straddle strategy is used in case of little volatility market scenarios wherein you expect none or very little movement in the price of the underlying. Such scenarios arise when there is no major news expected until expire. This is a limited profit and unlimited loss strategy. The maximum profit earned when, on expire date, the underlying asset is trading at the strike price at which the options are sold. The maximum loss is unlimited and occurs when underlying asset price moves sharply in upward or down... Read More The covered strangle option strategy is a bullish strategy. The strategy is created by owning or buying a stock and selling an OTM Call and OTM Put. It is called covered strangle because the upside risk of the strangle is covered or minimized. The strategy is perfect to use when you are prepared to sell the holding or bought shares at a higher price if the market moves up but would also is ready to buy more shares if the market moves downwards. The profit and in this strategy is unlimited while the risk is only on the downside.
Market View Neutral Bullish
Strategy Level Advance Advance
Options Type Call + Put Call + Put + Underlying
Number of Positions 2 3
Risk Profile Unlimited Limited
Reward Profile Limited Limited
Breakeven Point 2 Breakeven Points two break-even points

When and how to use Short Straddle (Sell Straddle or Naked Straddle) and Covered Strangle?

  Short Straddle (Sell Straddle or Naked Straddle) Covered Strangle
When to use?

This strategy is to be used when you expect a flat market in the coming days with very less movement in the prices of underlying asset.

A covered strangle strategy can be used when you are bullish on the market but also want to cover any downside risk. You are prepared to sell the shares on profit but are also willing to buy more shares in case the prices fall.

Market View Neutral

When trader don't expect much movement in its price in near future.

Bullish

The Strategy is perfect to apply when you're bullish on the market and expecting less volatility in the market.

Action
  • Sell Call Option
  • Sell Put Option

Buy 100 shares + Sell OTM Call +Sell OTM Put

The covered strangle options strategy can be executed by buying 100 shares of a stock while simultaneously selling an OTM Put and Call of the same the stock and similar expiration date.

Breakeven Point 2 Breakeven Points

There are 2 break even points in this strategy. The upper break even is hit when the underlying price is equal to the total of strike price of short call and net premium paid. The lower break even is hit when the underlying price is equal to the difference between strike price of short Put and net premium paid.

Break-even points:

Lower Breakeven = Strike Price of Put - Net Premium

Upper breakeven = Strike Price of Call+ Net Premium

two break-even points

There are 2 break-even points in the covered strangle strategy. One is the Upper break even point which is the sum of strike price of the Call option and premium received while the other is the lower break-even point which is the difference strike price of short Put and premium received.

Compare Risks and Rewards (Short Straddle (Sell Straddle or Naked Straddle) Vs Covered Strangle)

  Short Straddle (Sell Straddle or Naked Straddle) Covered Strangle
Risks Unlimited

There is a possibility of unlimited loss in the short straddle strategy. The loss occurs when the price of the underlying significantly moves upwards and downwards.

Loss = Price of Underlying - Strike Price of Short Call - Net Premium Received

Or

Loss= Strike Price of Short Put - Price of Underlying - Net Premium Received

Limited

The risk on this strategy is only on the downside when the price moves below the strike price of the Put option.

Rewards Limited

Maximum profit is limited to the net premium received. The profit is achieved when the price of the underlying is equal to either strike price of short Call or Put.

Limited

The maximum profit on this strategy happens when the stock price is above the call price on expiry. The profit is the total of the gain from buying/selling stocks and net premium received on selling options.

Maximum Profit Scenario Both Option not exercised

You will earn the maximum profit when the price of the stock is above the Call option strike price on expiry. You will be assigned on the Call option, would be able to sell holding shares on profit while retaining the premiums received while selling the options.

Maximum Loss Scenario

One Option exercised

The maximum loss would be when the stock price falls drastically and turns worthless. The premiums received while selling the options will compensate for some of the loss.

Pros & Cons or Short Straddle (Sell Straddle or Naked Straddle) and Covered Strangle

  Short Straddle (Sell Straddle or Naked Straddle) Covered Strangle
Advantages

It allows you to benefit from double time decay and earn profit in a less volatile scenario.

  • As the strategy involves buying shares when prices fall, there is long-term gain even if their short-term loss.
  • There is no upside risk due to the long position in stocks.
  • Allows you to earn income in a moderately bullish market.
Disadvantage

Unlimited losses if the price of the underlying move significantly in either direction.

  • The substantial risk when the price moves downwards.
  • Risk of assignments.
Simillar Strategies Short Strangle, Long Straddle Long Strangle, Short Strangle