Short Straddle

DEFINITION of 'Short Straddle'

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. Under what circumstances should I pursue a straddle?

    A straddle is an option strategy composed by an investor buying, or selling, a call option and a put option with the same ... Read Full Answer >>
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    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
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