{"id":8920,"date":"2021-03-02T19:11:00","date_gmt":"2021-03-03T00:11:00","guid":{"rendered":"https:\/\/ibkrcampus.eu\/trading-lessons\/neutral-market-short-straddle\/"},"modified":"2024-01-18T17:43:23","modified_gmt":"2024-01-18T17:43:23","slug":"neutral-market-short-straddle","status":"publish","type":"trading-lessons","link":"https:\/\/www.interactivebrokers.eu\/campus\/trading-lessons\/neutral-market-short-straddle\/","title":{"rendered":"Neutral Market \u2013 Short Straddle"},"content":{"rendered":"<p>The short straddle seller is hoping for a lack of movement in the price of the underlying shares and is indifferent to direction.\u00a0 It is a fairly pure bet on decreasing volatility, and benefits from decay.\u00a0 A short straddle is created when an investor sells an equal number of calls and puts with the same strike and expiration.\u00a0 It may be used when investors expect a decrease in either implied volatility or in the movement of the price of the underlying equity. Profit is limited to the initial premium received, while loss is potentially unlimited.\u00a0 The direction of the stock does not matter to the straddle buyer as long as the movement up or down from the strike stays within the price received for the straddle.\u00a0 The maximum gain is the cost of the trade and occurs if the stock closes at the strike price. Time decay helps a straddle seller.\u00a0 The combination has two breakeven points equal to the strike price plus the cost of the trade and the strike price minus the cost of the trade.\u00a0 The straddle seller loses money if the underlying price exceeds a range around the strike price beyond the total premium received.<\/p>\n<p><strong>Short Straddle example \u2013 <\/strong><\/p>\n<ul>\n<li>Underlying XYZ stock price: $50.00<\/li>\n<li>Call strike price: 50.00<\/li>\n<li>Call option premium: $5.00<\/li>\n<li>Put strike price: 50.00<\/li>\n<li>Put option premium :$5.00<\/li>\n<li>Days to expiration: 90<\/li>\n<li>Upside Breakeven: $50.00+$5.00+$5.00 = $60.00 (Strike price <em>plus<\/em> premium received for call <em>plus <\/em>premium received for put option)<\/li>\n<li>Downside Breakeven: $50.00-$5.00-$5.00 = $40.00 (Strike price <em>minus<\/em> premium received for call <em>minus <\/em>premium received for put option)<\/li>\n<li>Profit potential: Limited to the combined premiums from both call and put or $10.00 and occurs at the $50.00 strike price. At that strike price, neither option has any extrinsic value nor any intrinsic value at expiration. Above the central strike price, while the put option has zero value, the call option does and begins to erode the profitability of the trade. Below the central strike price, the call has zero extrinsic value, while the put has an increasing amount as the share price declines, thus also eroding the profitability of the trade.<\/li>\n<li>Potential profit:@$55.00 \u2013 The put option is out-the-money and has zero value. But the call option has $5.00 value and this must be subtracted from the net premium received ($10.00 &#8211; $5.00 = $5.00).<\/li>\n<li>@$60.00 \u2013 The in-the-money call option now has $10 intrinsic value is completely offsets the profitability of the trade ($10.00 &#8211; $10.00 = zero).<\/li>\n<li>@$38.00 \u2013 At all values below the central strike price the put option has intrinsic value, and in this case is worth $12.00 ($50.00 &#8211; $38.00 = $12.00). And so the net loss from the trade is the amount of net premium minus the distance between the central strike price and the value of the shares ($10.00 &#8211; $12.00 = $2.00).<\/li>\n<li>Maximum loss: Loss potential is unlimited to the upside, since the intrinsic call value keeps up with the rising share price penny-for-penny. Losses to the downside can be significant as the intrinsic nature of the put option matches the downside performance of the stock penny-for-penny, limited only by a zero value for the underlying share price.<\/li>\n<\/ul>\n<p>Market Outlook &#8211; Neutral<\/p>\n<p>Volatility View &#8211; Decreases premium<\/p>\n<p>Time Erosion &#8211; Reduces premium<\/p>\n<p>Dividends &#8211; Neutral<\/p>\n<p>Interest Rate &#8211; Neutral<\/p>\n<p>Profit Potential &#8211; Limited<\/p>\n<p>Loss Potential &#8211; Substantial from short put\/ unlimited from short call<\/p>\n<p>Components &#8211; Sell same strike call and put option with same expiration<\/p>\n<table>\n<tbody>\n<tr>\n<td width=\"89\">Underlying Stock<\/td>\n<td width=\"89\">\u00a0$\u00a0\u00a0 50.00<\/td>\n<td width=\"9\"><\/td>\n<td width=\"128\">Underlying Stock<\/td>\n<td width=\"110\">Call P&amp;L<\/td>\n<td width=\"100\">Put P&amp;L<\/td>\n<td width=\"99\">Total P&amp;L<\/td>\n<\/tr>\n<tr>\n<td width=\"89\">Call Strike<\/td>\n<td width=\"89\">\u00a0$\u00a0\u00a0 50.00<\/td>\n<td width=\"9\"><\/td>\n<td width=\"128\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 10.00<\/td>\n<td width=\"110\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\n<td width=\"100\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (3,500)<\/td>\n<td width=\"99\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0 (3,000)<\/td>\n<\/tr>\n<tr>\n<td width=\"89\">Premium<\/td>\n<td width=\"89\">\u00a0$\u00a0\u00a0\u00a0\u00a0 5.00<\/td>\n<td width=\"9\"><\/td>\n<td width=\"128\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 15.00<\/td>\n<td width=\"110\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\n<td width=\"100\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (3,000)<\/td>\n<td width=\"99\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0 (2,500)<\/td>\n<\/tr>\n<tr>\n<td width=\"89\">Put Strikes<\/td>\n<td width=\"89\">\u00a0$\u00a0\u00a0 50.00<\/td>\n<td width=\"9\"><\/td>\n<td width=\"128\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 20.00<\/td>\n<td width=\"110\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\n<td width=\"100\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (2,500)<\/td>\n<td width=\"99\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0 (2,000)<\/td>\n<\/tr>\n<tr>\n<td width=\"89\">Premium<\/td>\n<td width=\"89\">\u00a0$\u00a0\u00a0\u00a0\u00a0 5.00<\/td>\n<td width=\"9\"><\/td>\n<td width=\"128\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 25.00<\/td>\n<td width=\"110\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\n<td width=\"100\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (2,000)<\/td>\n<td width=\"99\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0 (1,500)<\/td>\n<\/tr>\n<tr>\n<td width=\"89\">Net Premium<\/td>\n<td width=\"89\">\u00a0$\u00a0\u00a0 10.00<\/td>\n<td width=\"9\"><\/td>\n<td width=\"128\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 30.00<\/td>\n<td width=\"110\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\n<td width=\"100\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (1,500)<\/td>\n<td width=\"99\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0 (1,000)<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"9\"><\/td>\n<td width=\"128\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 35.00<\/td>\n<td width=\"110\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\n<td width=\"100\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (1,000)<\/td>\n<td width=\"99\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (500)<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"9\"><\/td>\n<td width=\"128\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 40.00<\/td>\n<td width=\"110\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\n<td width=\"100\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (500)<\/td>\n<td width=\"99\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 &#8211;<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"9\"><\/td>\n<td width=\"128\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 45.00<\/td>\n<td width=\"110\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\n<td width=\"100\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 &#8211;<\/td>\n<td width=\"99\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"9\"><\/td>\n<td width=\"128\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 50.00<\/td>\n<td width=\"110\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\n<td width=\"100\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\n<td width=\"99\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 1,000<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"9\"><\/td>\n<td width=\"128\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 55.00<\/td>\n<td width=\"110\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 &#8211;<\/td>\n<td width=\"100\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\n<td width=\"99\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"9\"><\/td>\n<td width=\"128\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 60.00<\/td>\n<td width=\"110\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (500)<\/td>\n<td width=\"100\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\n<td width=\"99\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 &#8211;<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"9\"><\/td>\n<td width=\"128\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 65.00<\/td>\n<td width=\"110\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (1,000)<\/td>\n<td width=\"100\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\n<td width=\"99\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (500)<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"9\"><\/td>\n<td width=\"128\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 70.00<\/td>\n<td width=\"110\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (1,500)<\/td>\n<td width=\"100\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\n<td width=\"99\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0 (1,000)<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"9\"><\/td>\n<td width=\"128\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 75.00<\/td>\n<td width=\"110\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (2,000)<\/td>\n<td width=\"100\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\n<td width=\"99\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0 (1,500)<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"9\"><\/td>\n<td width=\"128\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 80.00<\/td>\n<td width=\"110\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (2,500)<\/td>\n<td width=\"100\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\n<td width=\"99\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0 (2,000)<\/td>\n<\/tr>\n<tr>\n<td width=\"89\"><\/td>\n<td width=\"89\"><\/td>\n<td width=\"9\"><\/td>\n<td width=\"128\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 85.00<\/td>\n<td width=\"110\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (3,000)<\/td>\n<td width=\"100\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\n<td width=\"99\">\u00a0$\u00a0\u00a0\u00a0\u00a0\u00a0 (2,500)<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n","protected":false},"excerpt":{"rendered":"<p>When neutral on the outlook for a stock, an investor might wish to generate income by selling same strike call and put options hoping that the stock will remain stuck in a defined range. Because implied volatility is a significant determinant of an option\u2019s premium, investors also try to take advantage of diminishing volatility ahead to sell straddles.<\/p>\n","protected":false},"author":899,"featured_media":8925,"parent":0,"comment_status":"open","ping_status":"closed","template":"","meta":{"_acf_changed":false,"footnotes":""},"contributors-categories":[149],"traders-academy":[101,103,105],"class_list":{"0":"post-8920","1":"trading-lessons","2":"type-trading-lessons","3":"status-publish","4":"has-post-thumbnail","6":"contributors-categories-interactive-brokers","7":"traders-academy-intermediate-trading","8":"traders-academy-level","9":"traders-academy-trading-lesson"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v27.4) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Archives | 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