Learn trading ideas & strategies from TradeKing's experts

Upcoming Live Events
More live events...
Learn it. Trade it.

Open your TradeKing account today!

Upcoming Live Events
More live events...

Short Straddle

The Setup

  • Sell a call, strike price A
  • Sell a put, strike price A
  • Generally, the stock price will be at strike A

NOTE: Both options have the same expiration month.

Who Should Run It

All-Stars only

NOTE: This strategy is only suited for the most advanced option traders and not for the faint of heart. Short straddles are mainly for market professionals who watch their account full-time. In other words, this is not a trade you manage from the golf course.

When to Run It

You’re expecting minimal movement on the stock. (In fact, you should be darn certain that the stock will stick close to strike A.)

The Sweet Spot

You want the stock exactly at strike A at expiration, so the options expire worthless. However, that’s extremely difficult to predict. Good luck with that.

About the Security

Options are contracts which control underlying assets, oftentimes stock. It is possible to buy (own or long) or sell (“write” or short) an option to initiate a position. Options are traded through a broker, like TradeKing, who charges a commission when buying or selling option contracts.

Options: The Basics is a great place to start when learning about options. Before trading options carefully consider your objectives, the risks, transaction costs and fees.

The Strategy

A short straddle gives you the obligation to sell the stock at strike price A and the obligation to buy the stock at strike price A if the options are assigned.

By selling two options, you significantly increase the income you would have achieved from selling a put or a call alone. But that comes at a cost. You have unlimited risk on the upside and substantial downside risk.

Advanced traders might run this strategy to take advantage of a possible decrease in implied volatility. If implied volatility is abnormally high for no apparent reason, the call and put may be overvalued. After the sale, the idea is to wait for volatility to drop and close the position at a profit.

Maximum Potential Profit

Potential profit is limited to the net credit received for selling the call and the put.

Maximum Potential Loss

If the stock goes up, your losses could be theoretically unlimited.

If the stock goes down, your losses may be substantial but limited to the strike price minus net credit received for selling the straddle.

Break-even at Expiration

There are two break-even points:

  • Strike A minus the net credit received.
  • Strike A plus the net credit received.

TradeKing Margin Requirements

Margin requirement is the short call or short put requirement (whichever is great), plus the premium received from the other side.

NOTE: The net credit received from establishing the short straddle may be applied to the initial margin requirement.

After this position is established, an ongoing maintenance margin requirement may apply. That means depending on how the underlying performs, an increase (or decrease) in the required margin is possible. Keep in mind this requirement is subject to change and is on a per-unit basis. So don’t forget to multiply by the total number of units when you’re doing the math.

As Time Goes By

For this strategy, time decay is your best friend. It works doubly in your favor, eroding the price of both options you sold. That means if you choose to close your position prior to expiration, it will be less expensive to buy it back.

Implied Volatility

After the strategy is established, you really want implied volatility to decrease. An increase in implied volatility is dangerous because it works doubly against you by increasing the price of both options you sold. That means if you wish to close your position prior to expiration, it will be more expensive to buy back those options.

An increase in implied volatility also suggests an increased possibility of a price swing, whereas you want the stock price to remain stable around strike A.

Options Guy's Tip

  • Even if you’re willing to accept high risk, you may wish to consider a short strangle since its sweet spot is wider than a short straddle’s.


422 Probability Calculator Image small
Probability Calculator The Probability Calculator uses implied volatility to help you estimate the probability of hitting your targets — before you ever place a trade.

1296 Trader Network Blogs
Trader Network Blogs Speak your mind about the securities you’re trading – and connect with other traders in our Network.

623 Option Strategy Scanner Image
Options Strategy Scanner Find the right basic or advanced options strategy to meet your specific criteria.

More tools...

Related Strategies

215 Cash-secured Put
Cash-Secured Puts A put option gives the buyer the right, but not the obligation, to sell the underlying stock at a given price for a given period of time. Put sellers earn a premium in exchange for taking on an...

266 Short Call Spread Image
Short Call Spread A short call spread obligates you to sell the stock at strike price A if the option is assigned but gives you the right to buy stock at strike price B. A short call spread is an alternative to the...

333 Back Spread w/Calls Image
Back Spread with Calls This is an interesting and unusual strategy. Essentially, you’re selling an at-the-money short call spread in order to help pay for the extra out-of-the-money long call at strike B. Ideally, you...

More strategies...