OPTIONS STRATEGIES·SHORT VOL·2 LEGS

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.

INPUTS
Underlying price
$
Centers the payoff chart and computes P&L at this price.
LEGS
Short call
Type
Side
Strike
$
Qty
Premium
$
Short put
Type
Side
Strike
$
Qty
Premium
$
RESULT
BE $95.00BE $105.00spot $100.00
$60.001 strike$140.00
P&L at current spot (expiry)
+$500
Net credit+$500
Max profit+$500
Max lossUnlimited
Breakevens$95.00 · $105.00
RISK PROFILE
Max profit
Total premium received
Max loss
Unlimited
Breakeven
Strike ± (total premium ÷ 100)
HOW IT WORKS

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.

WORKED EXAMPLE

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.

Total credit
($3.00 + $3.00) × 100 = $600 (max profit)
Breakevens
$94.00 and $106.00 — strike ± total credit
At expiry, XYZ = $100
Both expire worthless, keep $600
At expiry, XYZ = $120
Call assigned: −$2,000 + $600 = −$1,400
At expiry, XYZ = $140
−$4,000 + $600 = −$3,400, with no upper bound

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.

FIT

When a short straddle fits — and when it doesn't

Consider it when
  • 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.
Think twice when
  • 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.
FAQ

Common questions

How much can I lose on a short straddle?

There is no defined maximum. Losses are unlimited above the strike through the short call and run to the strike minus the credit below it through the short put.

When does a short straddle reach maximum profit?

Only if the stock finishes exactly at the strike at expiry, so both legs expire worthless. Any other outcome gives back part of the credit.

What is the difference between a short straddle and an iron butterfly?

An iron butterfly is a short straddle with long wings added further out. It collects less credit but converts an unlimited loss into a fixed, known maximum.

Why do traders sell straddles after earnings rather than before?

Implied volatility is highest just before the announcement and collapses right after. Selling into that collapse means the premium repricing works for you instead of against you.

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