Short Straddle is precisely the opposite of a (Long) Straddle. You short
at-the-money puts and calls with a short time to expiration (one month or less)
in order to pick up income. Because you are short options, time decay works for
you, so you only select short-term expiration dates.
you are exposed to potentially unlimited risk, which is another reason for
making this a short-term strategy. The problem is that you could be successful
at it for months, picking up modest income over and over again, and then all at
once you could have one big loss which would wipe out years worth of gains. It
is not worth it.
leg of the trade has uncapped downside. If the stock starts going ballistic in
direction, then your position is precarious to say the least. If the stock
remains rangebound, then you will make a limited profit. If the stock gaps in
either direction, you are history!
thing to note is that you would never trade this strategy right before a news
like an earnings report. You certainly would not want any nasty surprises to
lurking around the corner.
this income strategy when you anticipate a reduction in a stock’s volatility.
is trading at $25.37 on May 14, 2011.
June 2011 25 strike put for $1.20.
June 2011 strike call for $1.50.
credit: premiums sold = $2.70.
benefit is the possibility to garner a high yield from a rangebound stock.
risk is unlimited. The reward is limited to the net credit you receive for
selling puts and calls.
plus net credit.
when the position is profitable, and positive when it is not profitable.
Of Time Decay
You are in short options with unlimited downside, so you want to be in this
position for as short a time as possible.
stem a loss, you can close the losing side by buying back the option if the
stock breaks through resistance or support. Of, if the trade is profitable, you
could buy back both options.
the trade. Buy back your puts and calls.