What is Short Straddle? | How we trade Sell Straddle?

  •  Sell Straddle 

• Sell or Short Straddle is the opposite of Buy Straddle. It is used when the investor is expecting underlying to show no large movement. The investor expects the underlying to show little volatility Upside or Downside.

• This strategy involves Selling a Call as well as Put on the same underlying for the same maturity and Strike

• Price. It creates a net income for the investor.

• If the underlying does not move much in either direction, the investor retains the Premium as neither the Call nor the Put will be exercised. However, in case the underlying moves in either direction up or down significantly, the investor’s loss can be unlimited.

• This is a risky strategy and should be carefully adopted only when the expected volatility in the market is limited.

• Investor View: Neutral direction but expecting little volatility in underlying movement.

• Risk: Unlimited.

• Reward: Limited to the premium received.

• Lower Breakeven: Strike Price – net premium received. 

• Higher Breakeven: Strike Price + net premium received.

Illustration

• E.g. 

Nifty is currently trading @ 15500. Sell Straddle can be created by Selling Call and Put Option for Strike 15500 having premium of 65 and 35 respectively. The net inflow of premium is 100.

 Payoff Schedule

In the above chart, the breakeven happens the moment Nifty crosses 15400 or 15600, and reward is limited to a maximum of 7500 (calculated as Lot size * Premium received). Here it is important to note that the premium is calculated as the sum of the premium received for the Call and Put option. The risk in such a strategy is unlimited.