What is a 'Short Straddle'

A short straddle is an options strategy carried out by holding a short position in both a call and a put that have the same strike price and expiration date. The maximum profit is the amount of premium collected by writing the options.

BREAKING DOWN 'Short Straddle'

If a trader writes a straddle with a strike price of $25 and the price of the stock jumps up to $50, the trader would be obligated to sell the stock for $25. If the investor did not hold the underlying stock, he or she would be forced to buy it on the market for $50 and sell it for $25.

The short straddle is a risky strategy an investor uses when he or she believes that a stock's price will not move up or down significantly. Because of its riskiness, the short straddle should be employed only by advanced traders due to the unlimited amount of risk associated with a very large move up or down.

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RELATED FAQS
  1. How risky is a straddle?

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  2. When is an options straddle deep in the money?

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  3. Under what circumstances should I pursue a straddle?

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  4. What options strategies are best suited for investing in the telecommunications sector?

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  5. What kinds of financial instruments can I use a straddle for?

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