A short straddle is an advanced options strategy used when a trader is seeking to profit from an underlying stock trading in a narrow range.
To execute the strategy, a trader would sell a call and a put with the following conditions:
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Both options must use the same underlying stock
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Both options must have the same expiration
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Both options must have the same strike price
Since it involves having to sell both a call and a put, the trader gets to collect two premiums up-front, which also happens to be the maximum gain possible.
Due to the two premiums collected upfront, beginners are often attracted to this strategy without realizing the risks they face.
A short straddle can result in unlimited loss potential whenever a substantial move occurs so it should be used with caution, particularly around significant market events like an earnings announcement.
The opening position of this strategy means that you will start with a net credit and you will profit if the stock trades between the lower break-even point and the upper break-even point.
Let’s take a look at Barchart’s Short Straddle Screener for September 17th.
I have added a filter to only include stocks with a market capitalization greater than $40b and total call volume greater than 2,000.
The screener shows some interesting short straddle trades on popular stocks such as UPS, JD, DIS, OXY, UBER, PLTR and AAPL.
Let’s walk through a couple of examples.
UPS Stock Short Straddle Example
Let’s take a look at the first line item – a short straddle on UPS.
Using the October 17 expiry, the trade would involve selling the $85 strike call and the $85 strike put. The premium received for the trade would be $559 which is also the maximum profit.
The maximum loss is theoretically unlimited. The lower breakeven price is $79.41 and the upper breakeven price is $90.59.
The Barchart Technical Opinion rating is a 100% Sell with a Average short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
DIS Short Straddle Example
Let’s take a look at the third line item – a short straddle on Disney.
Using the October 17 expiry, the trade would involve selling the $115 strike call and the $115 strike put. The premium received for the trade would be $644 which is also the maximum profit.
