A Short Straddle involves selling a call option and a put option at the same strike price and expiry. It profits from minimal price movement.
- Ideal for low-volatility conditions, where price movement is expected to remain stable.
- Selling ATM options maximizes premium income.
- Risk is unlimited if the price moves significantly in either direction.
- Profits are limited to the combined premium received from the options.
Example:
- NIFTY trading at 18,000.
- Sell 18,000 Call at ₹200 and 18,000 Put at ₹150 (lot size = 50).
- Outcome:
- If NIFTY stays at 18,000 at expiry:
- Both options expire worthless.
- Net profit = ₹17,500.
- If NIFTY rises to 18,400 at expiry:
- Call loss = ₹200 × 50 = ₹10,000.
- Put expires worthless.
- Net loss = ₹10,000 − ₹17,500 = ₹7,500.
- If NIFTY falls to 17,600 at expiry:
- Put loss = ₹200 × 50 = ₹10,000.
- Call expires worthless.
- Net loss = ₹10,000 − ₹17,500 = ₹7,500.
- If NIFTY stays at 18,000 at expiry: