Tim Olson
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1.6 KiB
1.6 KiB
description, tags
| description | tags | |||||
|---|---|---|---|---|---|---|
| A bullish income strategy augmenting a covered call by also writing an ATM put at the same strike K, increasing income at the cost of additional downside exposure. |
|
Covered Short Straddle
Section: 2.32 | Asset Class: Options | Type: Income
Overview
The covered short straddle amounts to augmenting a covered call by writing a put option with the same strike K and TTM as the sold call option, thereby increasing the income. The trader's outlook is bullish. This is a combination of: long stock + short call at K + short put at K.
Construction
- Buy 1 share of stock at S0
- Sell 1 call option at strike K, receiving credit
- Sell 1 put option at strike K (same strike and expiry), receiving additional credit
Net credit: C (total premium from both short options)
Payoff Profile
f_T = S_T - S0 - (S_T - K)+ - (K - S_T)+ + C
- Breakeven: S* = (1/2)(S0 + K - C)
- Max profit: P_max = K - S0 + C (if S_T = K at expiry)
- Max loss: L_max = S0 + K - C (if stock goes to zero; put assignment + stock loss)
Key Conditions / Signals
- Bullish to neutral; expects stock to remain near or above K
- High implied volatility; writing both options collects more premium
- The additional short put increases income but also increases downside risk significantly
Notes
The downside risk is substantially higher than a plain covered call because the short put adds to the loss if the stock falls below K. The maximum loss occurs if the stock goes to zero (stock loss + put assignment at K).