Weekly Strategy Discussion

The Weekly Strategy Discussion is designed to assist individuals in learning how options work and in understanding various options strategies. Options involve risk and are not suitable for all investors. The strategies discussed are for educational and illustrative purposes only, and should not be construed as an endorsement, recommendation or solicitation to buy or sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.

The Short Straddle

Example:                 XYZ stock is trading at $65 

Outlook:                  You don't anticipate a big move either up or down over the next six weeks and you expect a possible decrease in volatility.

Possible strategy:    Sell the Straddle                                

                             Sell one 65 strike call at $3.20

                             Sell one 65 strike put at  $3.00

                                                 Net Credit $6.20

*All values shown are at the time of expiration. Commissions and other trading fees not included.

Stock

Short 65 Call
Profit/(Loss)

Short 65 Put
Profit/(Loss)

Net Profit
(Loss)

75

($6.80)

$3.00

($3.80)

70

($1.80)

$3.00

$1.20

65

$3.20

$3.00

 $6.20

60

$3.20   

($2.00)

$1.20

55

$3.20

($7.00)

($3.80)

 

 

 At Expiration:

  • Maximum Profit = Net Credit
  • Upside Breakeven = Strike Price + Net Credit
  • Upside Breakeven = $71.20
  • Downside Breakeven = Strike Price - Net Credit
  • Downside Breakeven = $58.80
  • Maximum Loss = Unlimited

In Summary: Maximum profit for the Short Straddle is at expiration when the stock closes at the strike price of the options that were sold.  Substantial loss is possible with a big move either way in XYZ stock over the next six weeks.