"Being comfortable with executing orders on the trading platforms is extremely important. I'm always happy to take the time out with a customer and walk them through the software, or if they are placing orders with me over the phone, making sure we both know exactly what their goal is with each and every trade."
– Matt Vitiello
Futures & Options Broker
14. Short Straddle
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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
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