Short Straddle
Description
The Short Straddle is precisely the opposite of a (Long) Straddle. We short ATM puts
and calls with a short time to expiration (one month or less) in order to pick up
income. Because were short options, time decay works for us, so we only select
short-term expiration dates. Also we are exposed to potentially unlimited risk, which
is another reason for making this a short-term strategy. The problem is that you could
be successful at it for months, picking up modest income over and over again, and
then whooomph,one big loss will wipe out years worth of gains. Its not worth it.
Each leg of the trade has uncapped downside. If the stock starts going ballistic in
either direction, then your position is precarious to say the least. If the stock remains
rangebound, then well make a limited profit. If the stock gaps in either direction,
were history!
One thing to note is that you would never trade this strategy right before a news
event like an earnings report. You certainly wouldnt want any nasty surprises to
be lurking around the corner
P/L Profile
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