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Short Straddle

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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

Short Straddle

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.

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Option Profit Diagram Example

  • As you move to the right the underlying asset increases in value. The left side is lower in underlying price, while the right side is higher in underlying price.
  • As you move to the top the trade increases in profit. The gray horizontal line is the profit/loss difference point, the zero line where there is no profit and no loss. Higher above the line is higher in profit, lower below the line is higher in losses.
  • The blue line is the profit/loss at expiration. The purple line is the profit/loss now. Eventually the curving purple line will become the blue line.
  • A flat blue line below the grey zero line indicates limited losses at expiration. A flat blue line above the grey zero line indicates limited gains at expiration. A blue line that slopes down infinitely off the chart represents unlimited losses, while a line that slopes infinitely up represents unlimited gains.
  • A preference for limited loss trades is strongly recommended, remember that an estimated 60% to 70% of retail trader options expire worthless when purchased since prices need a reason to move in the money. If you have limited gains, they should preferably be both more likely than and higher than your potential losses. Always manage risk carefully.
  • Option diagrams created by TDAmeritrade “ThinkOrSwim” platform.