Definition
Short Straddle
A short straddle sells a call and a put at the same strike to profit when the underlying stays calm and range-bound.
You sell an at-the-money call and an at-the-money put, collecting both premiums. You keep the maximum profit if the underlying expires exactly at the strike, and you stay profitable as long as it moves less than the total premium collected. It is a bet that volatility will be low.
Short straddles on Nifty and Bank Nifty are extremely popular with Indian option sellers, especially on weekly expiry when theta decay is fastest. But the risk is unlimited on both sides — a sudden gap or news spike can cause large losses — and high gamma near expiry makes them treacherous, so most sellers hedge or convert to iron flies.
Related terms
- Long StraddleA long straddle buys a call and a put at the same strike to profit from a big move in either direction.
- Short StrangleA short strangle sells an out-of-the-money call and an out-of-the-money put to earn premium in a quiet market.
- Iron ButterflyAn iron butterfly sells an at-the-money straddle and buys protective wings, for high premium with defined risk.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.