14. Short Straddle
Scenario:
This trader finds a market with relatively high implied volatility. The current feeling is the market will
stabilize after having had a long run to its present level. To take advantage of time decay and dropping
volatility this trader sells both a call and a put at the same strike price.
| Specifics: |
|
|
| Underlying Futures Contract: |
September Japanese Yen |
|
| Futures Price Level: |
0.8600 |
|
| Days to Futures Expiration: |
40 |
|
| Days to Options Expiration: |
30 |
|
| Option Implied Volatility: |
12.6% |
|
| Option Position: |
Short 1 Sep 0.8600 Call |
+ 0.0100 ($1250.00) |
|
Short 1 Sep 0.8600 Put |
+ 0.0100 ($1250.00) |
|
|
+ 0.0200 ($2500.00) |
| At Expiration: |
| Breakeven: |
Downside: 0.8400 (0.8600 strike - 0.0200 credit).
Upside: 0.8800 (0.8600 strike + 0.0200 credit). |
| Loss Risk: |
Unlimited; losses increase as futures fall below 0.8400 breakeven or rise above 0.8800 breakeven. |
| Potential Gain: |
Limited to credit received; maximum profit of 0.0200 ($2500) achieved as position is held to expiration and futures close exactly 0.8600 strike. |
Things to Watch:
This is primarily a volatility play. A trader enters into this position with no clear idea of market direction but a forecast of less movement (risk) in the underlying futures. Be aware of early exercise. Assignment of a futures position transforms this strategy into a synthetic short call or synthetic short put.
Follow-up Trading Strategies
