Tim Olson
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1.4 KiB
1.4 KiB
description, tags
| description | tags | ||||
|---|---|---|---|---|---|
| A sideways income strategy selling an ATM call and an ATM put at the same strike K, collecting premium when the stock stays near K. |
|
Short Straddle
Section: 2.25 | Asset Class: Options | Type: Income
Overview
The short straddle is a sideways strategy consisting of a short position in an ATM call option and a short position in an ATM put option with the same strike K. This is a net credit trade. The trader's outlook is neutral. This is an income strategy that profits if the stock remains near K until expiry.
Construction
- Sell 1 ATM call option at strike K
- Sell 1 ATM put option at strike K, same expiry
Net credit: C
Payoff Profile
f_T = -(S_T - K)+ - (K - S_T)+ + C
- Upper breakeven: S*_up = K + C
- Lower breakeven: S*_down = K - C
- Max profit: P_max = C (if S_T = K at expiry; both options expire worthless)
- Max loss: L_max = unlimited (stock can move far in either direction)
Key Conditions / Signals
- Neutral view; expects stock to remain very close to K through expiry
- High implied volatility environment makes the collected credit larger
- Ideal when volatility is expected to contract (sell elevated IV, profit from IV crush)
Notes
Unlimited risk in both directions. The position is short vega and long theta. A sharp move in either direction can result in catastrophic losses. Active management (delta hedging or stop-losses) is essential.