Short straddle
Sell a call and a put at the same strike. Collects two premiums; profits if the stock stays near the strike. Unlimited risk on the call side.
How a short straddle works
A short straddle sells a call and a put at the same strike and expiry, collecting both premiums. It is the direct inverse of the long straddle: you profit when the stock stays near the strike, and lose when it moves. Maximum profit is the credit, achieved only if the stock finishes exactly at the strike.
The risk deserves to be stated bluntly. The short call side has no upper bound, so the position carries unlimited loss potential above the strike, and a large but finite loss below it. This is an undefined-risk trade requiring significant margin, and the credit is fixed while the loss is not.
Time decay is the engine. A short straddle sells the maximum amount of extrinsic value available at a single strike, and every quiet day transfers some of it to you. Falling implied volatility helps as well, which is why the position is often opened just after a catalyst rather than before one.
A worked example
XYZ trades at $100 and you expect it to stay pinned. You sell the $100 call for $3.00 and the $100 put for $3.00, both expiring in 30 days.
One $140 print erases more than five maximum-profit months. Adding wings — converting this to an iron butterfly — gives up part of the credit and removes the tail entirely, which is the version most traders should be running.
When a short straddle fits — and when it doesn't
- You expect a tight range and implied volatility to fall, typically after a catalyst has passed.
- You have the margin, permissions, and experience for an undefined-risk position.
- You have a defined adjustment plan before you enter, not after the move starts.
- Almost always, if an iron butterfly would express the same view. The defined-risk version costs credit and buys a hard floor.
- Any scheduled catalyst falls inside the expiry.
- Implied volatility is already low — thin credit, unchanged tail.
Common questions
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