Friday, September 11, 2015

Short Straddles - Option Strategy Help

Short Straddles for Series 7 - A tutor and tips post for those needing Options help.

A short straddle is the selling or "shorting" of a call and a put option on the same stock or security. These are part of the Options section on the Series 7 but this tutorial can also help individual traders.

The idea or motivation behind a short straddle is to collect the premiums on both options and then hope they expire, thus keeping the premium and attaining a profit. This is one of the few option strategies where an investor wants a neutral market. Nothing too up or down.

Since you will be tested on questions related to Straddles - their maximum gain, loss, break even etc. Lets lay out an example.

SHORT 1 KLK OCT 35 CALL @ $400
SHORT 1 KLK OCT 35 PUT @ $200


The combined premiums collected is the profit point and is the trader's maximum gain.

The maximum gain is $600

The maximum loss is unlimited because of the short call. When you short a naked call, the maximum loss is always unlimited. Shorting a Put does not protect the call or vice versa.

The Break even points are the combined premiums added to the call strike price of 35 and subtracted from the put.

The combined premium is $600 or 6 points.

Thus, the break even points (there are always 2 with straddles) are 41 and 29. If the stock exceeds or goes below these points, the investor is not profitable.

If this were a LONG STRADDLE - The break evens would be the same but the profit would BEGIN as those points are broken through, since in that case the premiums were paid. Long Straddle Option Strategies were discussed in another post on this blog.

SERIES 7 COURSE OPTIONS (BOOKS, SOFTWARE, ONLINE, CLASSES AND MORE)

No comments:

Post a Comment