The short straddle, like the long straddle, is considered a neutral strategy. The short and long straddles are different in the way they respond to movement in the market. They are both neutral because the trader does not have a preference about the direction of the stocks.
The short straddle is the opposite of the long straddle. You can create the strategy if you feel that the stock is will not move in either direction. This is the same also with the long butterfly but is riskier. In short, the long butterfly offers the same benefits with less risk.
Here is an example of the short straddle:
|Sell 1 160 Call @ $ 14.50||($140.50)|
|Sell 1 160 Put @ $13.50||($1,350.00)|
Here, you can sell the straddles at $28 since you can get a better price by selling two options.
Now, you can see your profit below:
|Stock Price||Profit (L)|
The $2,800 will be your maximum profit. The position is movement sensitive and like the long straddle it ahs up and downside breakeven points: Here are the formulas:
Upside breakeven: Straddle Strike + Sale Price Straddle
Downside breakeven: Straddle Strike – Sale Price of Straddle
From this you can see that you will have a profit as long as the stock stays at 132 and 188. Anything above or below those prices will mean unlimited loss in either direction. The exampled does not include the commission, interest and tax.
|Bullish Strategies||Neutral Strategies||Bearish Strategies|