15. Straddle

  • Made of a short OTM put and a short OTM call just like the Strangle but with at same strike price, generally it is ATM strike price
  • Benefits when the underlying trades inside a range
  • Benefits when the underlying IV decreases after the position has been taken
  • The strike price doesn't need to be ATM, but mostly it traded ATM
  • Undefined risk position

Advantages

  • This position is profitable if the underlying stays inside a range
  • Also profitable if the IV decreases after establishing the strangle
  • Time decays works in favor of this position, because your betting on somthing not happening
  • Max profit happens only at expiration with both options expiring worthless
  • It could be stablished as a delta neutral strategy initially
    • For example the short put may give you 20 deltas and the short call may give you -20 deltas, so they offset and you have no delta

Analysis

  • Short 1 OTM put at strike price K for a credit of P
  • Short 1 OTM call at atrike price K for a credit of C
  • Max loss is unlimited
  • Max profit is the credit you recieved for the options P + C

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Example

  • Underlying at 100
  • Sell one ATM put for 6.50 and one ATM call for 6.50
  • This position is the 100 Stradle for $13
  • Max profit is 13
  • Breakevens are 113 and 87

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Table Of Contents
15. Straddle
Advantages
Analysis
Example