Loading ... ... Please wait!      Loading
Visually Analyze Option Strategies
Market
 Home    Tutorials   Features   APPL 1.0   Webservices   Component-Lib    Login    Subscription   User Guide 

Covered Short Straddle

Description
   The Covered Short Straddle is the most risky type of income strategy.
      The concept is to increase the yield of the Covered Call by selling a put at the
   same strike as the sold call. In this way, we take in the additional income from the
   sold put; however, there is a significant price to pay in terms of risk.
      First, the sold put adds significant extra risk to the trade. The amount of poten-
   tial risk added is the put strike less the put premium received. Say if we trade a
   Covered Call on a $24.00 stock, taking in $1.00 for the call, our risk and breakeven
   is $23.00. If we sold a put for another $1.00, our initial yield on cash would be
   doubled. . . but our risk would have increased by another $24.00 ($25.00 $1.00),
   making our total risk $47.00 if the stock falls to zero. Although this is unlikely to
   occur in just one month, the position can become loss-making at approximately dou-
   ble the speed as a simple Covered Call position, so if the stock starts to fall, we’re in
   trouble much more quickly.
      Second, with a Covered Short Straddle, we are almost certain to be exercised
   because we have shorted both the put and the call at the same strike price. So unless
   the stock is at the strike price at expiration, we face a certain exercise, which many
   people are uncomfortable with. If the stock is above the strike at expiration, then
   we are quite happy because our sold put expires worthless, our sold call is exercised,
   and we simply deliver the stock we already own. However, if the stock is below the
   strike at expiration, then our call expires worthless, our sold put is exercised, and we
   are required to purchase more stock at the strike price. With a falling stock, this can
   be pricey and undesirable.

P/L Profile

       

	



 
Copyright ©2012, Avasaram LLC. All rights reserved. Version null Follow us on   Contact
Disclaimer
The information contained in this website is provided to you "as is," for your informational purposes only, without any representation or warranty of accuracy or completeness of information or other warranty of any kind. In no event will avasaram.com be liable to any party for any direct, indirect, incidental, special or consequential damages for use of this website or reliance upon any information or material accessed via it or any other hyperlinked website including, but not limited to, damages arising from loss of profits, business interruption, or loss of data.