Short Straddle - Neutral Strategy

Short Straddle:

Short Straddle is the exactly opposite of Buy Straddle. It is used when the option trader is expecting underlying to show no large movement. Investor expects the underlying to show little volatility Upside or Downside. In this Strategy Investor is credited with a premium since he or she writes the call and put on the same underlying for the same maturity and StrikePrice

By selling two options, you significantly increase the income you would have achieved from selling a put or a call alone. But that comes at a cost. You have unlimited risk on the upside and substantial downside risk

Nifty Options Short Straddle

Sell 1 ATM Index Call

Sell 1 ATM Index Put

Investor View: Neutral direction but expecting little volatility in underlying movement.

Risk: Unlimited.

Reward: Limited to the premium received.

Higher Breakeven: Strike Price + net premium received.

Lower Breakeven: Strike Price - net premium received.

Illustration

Index	Nifty
Nifty Lot Size	50
Underlying Strike Price	5500
Call Premium	Rs 81    (Call Premium Received)
Put Premium	Rs 50    (Put Premium Received)
Higher Breakeven Point	Rs 5639 (Strike Price+Call Put premium received)
Lower Breakeven Point	Rs 5367 (Strike Price–Call Put premium received)

Nifty Short Straddle Payoff Diagram

Reward Potential

• Profit = Limited
• Profit Achieved When Settlement Price of Nifty < Strike Price of Long Call i.e. 5500 + Net Premium Received i.e. 131 OR Nifty Settlement Price < Strike Price of Long Put i.e. 5500 - Net Premium received i.e. 131
• Maximum Profit = Settlement Price of Nifty = Strike Price of Short Call / Short Put

Risk Potential 

• Max Loss = Unlimited
• Max Loss Occurs When Settlement Price of Nifty  = Price of Nifty - Strike Price of Short Call i.e. 5500 - Net Premium Received i.e. 131 OR Strike Price of Short Put i.e5500 – Settlement Price of Nifty - Net Premium Received i.e 131 + (Brokerage + Statutory Charges Paid)

Nifty Closing Price @	Profit/Loss
5300	3450 (Profit)
5400	1550 (Profit)
5500	6550 (Profit)
5600	1550 (Profit)
5700	3450 (Profit)

Example:

Let us assume Nifty is trading at 5510 in Apr 2013. An options trader enters a Short straddle by buy Selling a Apr 5500 put for Rs 50/- and a Apr 5500 call for Rs 81. The net premium received to enter the trade is Rs 6550 ((Call Option Premium + Put Option Premium) X 50 Lot size), which is also his maximum possible profit.

If Nifty is trading at 5600 on expiration in April, the Apr 5500 put will expire worthless but the April 5500 call expires in the money and will possess intrinsic value of Rs 100,Subtracting the premium received of Rs 131, the long straddle trader's profit comes to Rs 31 X 50 Lot size i.e Rs 1550

On expiration in April, if Nifty is still trading at 5500, both the Apr 5500 put and the Apr 5500 call expire worthless and the short straddle trader  receives a maximum profit which is equal to the actual premium received Rs 6550 ((Call Option Premium + Put Option Premium) X 50 Lot size)  taken to enter the trade.

For More Information about other strategies kindly click on below links
Guide To Options Basics
Long Call
Long Put
Short Call 
Short Put
Long Straddle
Short Straddle
Synthetic Long Call