Contents

Short Straddle

Short Straddle is a neutral strategy where you expect the price to stay within a range. It involves Selling an ATM CALL & Selling an ATM PUT.

This strategy has an unlimited risk both on the upside and the downside. This strategy has to be used only when the implied volatility is falling from a high.

Intra-day Straddles provide high returns compared to any other neutral strategy. Also, this strategy is used before RBI monetary policy meets and results announcement to capture volatility crush. Premiums fall significantly post these events.

Traders usually trade this strategy mainly on Index options as they are less volatile compared to stocks.

Trade Set-Up

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Sell PUT at a certain Strike Price

short put-Finvezto

Sell CALL at the same Strike Price

short call-Finvezto

Short Straddle

Short Straddle-Finvezto

Illustration using Nifty Options

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Short Straddle-Finvezto
Snapshot from Upstox.com Strategy Builder

In the pay-off graph above, the price of the underlying asset (Nifty) is plotted in the X-Axis and the profit/loss is plotted in the Y-Axis.

The black line with dots indicates the profit or loss at different prices of the underlying asset.

The region shaded in green indicates profitable zone and the region shaded in grey indicates loss zone.

The negative symbol in the Quantity column indicates a Sell position.

When to use? - Entry Checklist

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Market Outlook
  • When you expect price to stay within a support and a resistance
  • Volatility
  • Implied Volatility should be high and falling
  • Open Interest
  • Equal CALL & PUT build up around the support & resistance zone
  • Positional or Intraday?
  • Overnight positions are risky as the risk is unlimited
  • Better to use as an intraday strategy. This strategy provides highest returns compared to all other neutral strategies
  • Risk & Reward

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    Risk [Loss]
  • Maximum Risk is unlimited both on the upside and downside
  • Reward [Profit]
  • Maximum profit is limited to the net credit received. Maximum profit is at the strike price at which you sold the CALL & PUT.
  • Break Even Point
  • The Strike Price plus or minus the total premium received.
  • Options Greeks Impact

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    Time Decay Impact [Theta]
  • Time decay is extremely helpful for the position.
  • Volatility impact [Vega]
  • If the implied volatility decreases after you initiate the position, then it is helpful for the position
  • If the implied volatility increases after you establish the position, then it is harmful for the position as the price of both the CALL & PUT might go up.
  • Trade Management & Exit

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    Rolling & Adjustments
  • Rolling is possible for a Short Straddle
  • When the position is going against you, exit the side which has made good profits. Then, sell a new CALL or PUT at a new strike to match the losing side. You will set up a new straddle at a different strike price as price keeps moving.
  • Stop Loss & Exit
  • Risk should be 1-2% of your capital
  • Exit when the price breaks above the resistance or support level.