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Home / Education / Futures & Options Strategy Guide / Short Straddle

Short Straddle

Overview

Pattern evolution:
Short Straddle

Learn 21 futures and options trading strategies in this complimentary,  easy-to-read guide. Download Now >>

When to use: If market is near A and you expect market is stagnating. Because you are short options, you reap profits as they decay — as long as market remains near A.

Profit characteristics: Profit maximized if market, at expiration, is at A. In call-put scenario (most common), maximum profit is equal to the credit from establishing position; break-even is A +/– total credit.

Loss characteristics: Loss potential open-ended in either direction. Position, therefore, must be closely monitored and readjusted to delta neutral if market begins to drift away from A.

Decay characteristics: Because you are only short options, you pick up time-value decay at an increasing rate as expiration approaches. Time decay is maximized if market is near A.

CATEGORY: Precision
Short call A, short put A
SYNTHETICS:
Short 2 calls A, long instrument
Short 2 puts A, short instrument
(All done to initial delta neutrality)

Example

Short Straddle Example

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.

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Additional Futures & Options Strategies

  • How to Use This Guide
  • Long Futures
  • Long Synthetic Futures
  • Short Synthetic Futures
  • Long Risk Reversal
  • Short Risk Reversal
  • Long Call
  • Short Call
  • Long Put
  • Short Put
  • Bull Spread
  • Bear Spread
  • Long Butterfly
  • Short Butterfly
  • Long Iron Butterfly
  • Short Iron Butterfly
  • Long Straddle
  • Long Strangle
  • Short Strangle
  • Ratio Call Spread
  • Ratio Put Spread
  • Ratio Call Backspread
  • Ratio Put Backspread
  • Box or Conversion

Contents Courtesy of CME Group.

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Risk Disclosure

THIS MATERIAL IS CONVEYED AS A SOLICITATION FOR ENTERING INTO A DERIVATIVES TRANSACTION.

THIS MATERIAL HAS BEEN PREPARED BY A DANIELS TRADING BROKER WHO PROVIDES RESEARCH MARKET COMMENTARY AND TRADE RECOMMENDATIONS AS PART OF HIS OR HER SOLICITATION FOR ACCOUNTS AND SOLICITATION FOR TRADES; HOWEVER, DANIELS TRADING DOES NOT MAINTAIN A RESEARCH DEPARTMENT AS DEFINED IN CFTC RULE 1.71. DANIELS TRADING, ITS PRINCIPALS, BROKERS AND EMPLOYEES MAY TRADE IN DERIVATIVES FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS RISK TOLERANCE, MARGIN REQUIREMENTS, TRADING OBJECTIVES, SHORT TERM VS. LONG TERM STRATEGIES, TECHNICAL VS. FUNDAMENTAL MARKET ANALYSIS, AND OTHER FACTORS) SUCH TRADING MAY RESULT IN THE INITIATION OR LIQUIDATION OF POSITIONS THAT ARE DIFFERENT FROM OR CONTRARY TO THE OPINIONS AND RECOMMENDATIONS CONTAINED THEREIN.

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