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Short Straddle (Sell Straddle or Naked Straddle) Options Trading Strategy Explained

Published on Thursday, April 19, 2018 | Modified on Wednesday, June 5, 2019

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Short Straddle (Sell Straddle or Naked Straddle)

Short Straddle (Sell Straddle or Naked Straddle) Options Strategy

Strategy LevelAdvance
Instruments TradedCall + Put
Number of Positions2
Market ViewNeutral
Risk ProfileUnlimited
Reward ProfileLimited
Breakeven Point2 Breakeven Points

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 downward direction on the day of expiring.

The usual Short Straddle Strategy looks like as below for NIFTY current index value at 10400 (NIFTY Spot Price):

Options Strangle Orders
OrdersNIFTY Strike Price
Sell 1 Put OptionNIFTY18APR10400PE
Sell 1 Call OptionNIFTY18APR10400CE

Suppose NIFTY is currently trading at 10400. You don't expect much movement in its price in near future. The Short Straddle strategy can be implemented by selling 10400 NIFTY Put and 10400 NIFTY Call. The net premium received by selling Put and Call Options will be your maximum profit while the losses can be unlimited if the price moves sharply in either direction.

When to use Short Straddle (Sell Straddle or Naked Straddle) strategy?

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.

Example

Example 1 - Stock Options:

Let's take a simple example of a stock trading at ₹40 (spot price) in June. The option contracts for this stock are available at the premium of:

  • July 40 Put - ₹2
  • July 40 Call - ₹2

Lot size: 100 shares in 1 lot

  1. Sell 'July 40 Put': 100*1 = 200
  2. Sell 'July 40 Call': 100*1 = 200

Net Credit: ₹200 + ₹200 = ₹400

This Net Credit is also the Max Profit under this strategy.

Now let's discuss the possible scenarios:

Scenario 1: Stock price remains unchanged at ₹40

  • July 40 Put - Expires worthless
  • July 40 Call - Expires worthless
  • The net credit was ₹400 initially received to take the position.
  • Total Profit = ₹400

The total profit of ₹400 is also the maximum profit in this strategy. This is the amount you received as net premium at the time you enter in the trade.

Scenario 2: Stock price goes above ₹50

  • July 40 Put - Expires worthless
  • July 40 Call Expires in-the-money with an intrinsic value of (50-40)*100 = ₹1000
  • The net credit was ₹400 initially received to take the position.
  • Total Loss = -₹1000 + ₹400 = -₹600

Scenario 3: Stock price goes down to ₹30

  • July 40 Put Expires in-the-money with an intrinsic value of (40-30)*100 = ₹1000
  • July 40 Call - Expires worthless
  • The net credit was ₹400 initially received to take the position.
  • Total Loss = -₹1000 + ₹400 = -₹600

Example 2 - Bank Nifty

Long Straddle Example Bank Nifty
Bank Nifty Spot Price8900
Bank Nifty Lot Size25
Long Straddle Options Strategy
Strike Price(₹)Premium(₹)Total Premium Paid(₹)
(Premium * lot size 25)
Sell 1 Call90001002500
Sell 1 Put90002005000
Net Premium (200+100)3007500
Upper Breakeven(₹)Strike price of Call + Net Premium
(9000 + 300)
9300
Lower Breakeven(₹)Strike price of put - Net Premium
(9000 - 300)
8700
Maximum Possible Prodit (₹)Net Premium Paid7500
Maximum Possible Loss (₹)Unlimited
On Expiry Bank NIFTY closes atNet Payoff from 1 Call Sold (₹) @9000Net Payoff from 1 Put Sold (₹) @9000Net Payoff (₹)
80002500-20000-17500
84002500-10000-7500
87002500-25000
9000250050007500
9300-500050000
9600-125005000-7500
10000-225005000-17500
short straddle example bank nifty

Market View - Neutral

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

Actions

  • Sell Call Option
  • Sell Put Option

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

Risk Profile of Short Straddle (Sell Straddle or Naked Straddle)

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

Reward Profile of Short Straddle (Sell Straddle or Naked Straddle)

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.

Max Profit Scenario of Short Straddle (Sell Straddle or Naked Straddle)

Both Option not exercised

Max Loss Scenario of Short Straddle (Sell Straddle or Naked Straddle)

One Option exercised

Advantage of Short Straddle (Sell Straddle or Naked Straddle)

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

Disadvantage of Short Straddle (Sell Straddle or Naked Straddle)

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

How to exit?

  • Wait for Options to expire and retain premium received.
  • Buy Call and Put options.

Simillar Strategies

Short Strangle, Long Straddle

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