Options strategy guide

Short straddle strategy

A short straddle sells one call and one put at the same strike and expiration. It receives a net credit and is exposed to a large move in either direction. The position is generally used only when the trader expects the underlying to stay near the strike and understands the risk of a sharp move.

Payoff and maximum risk

At expiration, the position's breakevens are the shared strike plus and minus the total credit received. The maximum profit is limited to that credit, reached if the stock finishes at the strike. A decline can produce a very large loss as the stock approaches zero. A rally can produce a theoretically unlimited loss because a short call has no upper bound on its loss.

The broker may require substantial margin, and margin requirements can rise as volatility or the share price changes. Early assignment can create a stock position. This is not a defined-risk trade, and the premium does not cap the loss.

Earnings and volatility

An expected move is a price-based estimate from option premiums, not a maximum range. An earnings gap can move well beyond it. Implied volatility may fall after the report, but that does not guarantee the short options will profit: the stock move, remaining time value, spread costs and execution all affect the result.

Example

If a stock is at $100 and a same-expiration 100 call and put are sold for a combined $7 credit, the expiration breakevens are $93 and $107. The best possible expiration outcome is the $700 credit per standard contract. A finish below $93 loses money, and a finish above $107 also loses money; above the upper breakeven, call losses continue to grow without a theoretical cap.

Practical checks

• Size from the stress loss you can tolerate, not the premium collected.
• Confirm the broker's buying-power and assignment treatment before entry.
• Account for earnings gaps, early exercise, liquidity, commissions and slippage.
• Do not treat an implied move or historical sample as a protective boundary.

This guide is educational and does not recommend opening a short straddle. Options involve substantial risk; review the research methodology and full disclaimer.