Short Straddle (SELL CALL + SELL PUT of same strike)

Short Straddle (SELL CALL + SELL PUT of same strike)

A Short Straddle is the opposite of Long Straddle. It is a strategy to be adopted when the investor feels the market will not show much movement. He sells a Call and a Put on the same stock/index for the same maturity and strike price. It creates a net income for the investor. If the stock /index does not move much in either direction, the investor retains the Premium as neither the Call nor the Put will be exercised. However, incase the stock / index moves in either direction, up or down significantly, the investor’s losses can be significant. So this is a risky strategy and should be carefully adopted and only when the expected volatility in the market is limited.

Market Scenario: Less Volatile

Risk: Unlimited

Reward: Limited to the premium received

BEP:   Upper Breakeven Point = Strike Price of Short Call + Net Premium Received

Lower Breakeven Point = Strike Price of Short Put - Net Premium Received

EXAMPLE:

Entry:

SPOT

5100

   

                    

	STRIKE	PREMIUM
SELL CALL	5000	122
SELL PUT	5000	85

UPPER BEP: 5000 + 207 = 5207                                          LOWER BEP: 5000 – 207 = 4793

On Exit if:

SPOT	CALL PAY-OFF	PUT PAY-OFF	STRATEGY PAY-OFF
4600	122	-315	-193
4700	122	-215	-93
4793	122	-122	0
4800	122	-115	7
4900	122	-15	107
5000	122	85	207
5100	22	85	107
5200	-78	85	7
5207	-85	85	0
5300	-178	85	-93
5400	-278	85	-193

Short Straddle - Strategy Pay-Off