Short Straddle

Straddles utilize options to benefit from a large, or alternatively small, amount of price volatility. A long straddle profits from a high amount of volatility, while a short straddle profits from a low amount. Due to their construction, the direction of price movements within straddles is not as important as the actual volatility level. A long straddle profits if price moves outside of two boundaries. A short straddle profits if the price stays within the two boundaries.

Short Straddle

How To Read/Interpret Option Diagram

A short straddle operates opposite to a long straddle. Instead of purchasing the put and the call, you write put and call options which expire at the same time at the same strike price. You earn a profit if the market price stays between the bounds created by the premium earned. A short straddle is a bet on low volatility. In this strategy, the best scenario is the share price staying between the boundaries created by the premium. The worst case is share price crashing or soaring beyond either of the two boundaries. Short straddles are often sold against indexes, much like condors or iron condors, since they typically have little volatility.

A short straddle receives premiums from the call and put written. Losses will occur if underlying asset price moves positively or negatively beyond the premium earned. If the call is exercised you will need to deliver the asset. If you don’t own the underlying asset, you will be forced to purchase the asset and then deliver it. If the put is exercised, you will be forced to buy the asset.