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Options Straddle Strategy (Short Straddle vs Long Straddle)

Options Trading Strategies? Sounds difficult? Already worried? Well, don’t worry! We’ll help you break this down easily.
Here, we will discuss the Options Straddle Strategy (Short Straddle vs Long Straddle) in detail.

Options Trading Strategies

Option trading strategies use simple, “one-legged” orders to complex “multi-legged” orders. But simple or complex, what all strategies have in common is that they are based on two fundamental option types: CALL and PUT.

Straddle

Straddle is an options strategy where you can buy (or sell) a CALL and PUT with the same strike price and expiration date.

Let us understand these strategies one by one.

    1. Short Straddle (Sell Straddle or Naked Straddle)
    2. Long Straddle (Buy Straddle)

Also, check the Options Strangle Strategy (Short Strangle vs Long Strangle)

The automated version of this strategy is readily available at Myalgomate Marketplace as Time Based Options Straddle/Options  Strangle.

Options Straddle Strategy (Short Straddle Vs Long Straddle)
Options Straddle Strategy (Short Straddle vs Long Straddle)

Short Straddle (Sell Straddle or Naked Straddle) Options Straddle Strategy

Short Straddle (Sell Straddle Or Naked Straddle)

Strategy Level Advance
Instruments Traded Call + Put
Number of Positions 2
Market View Neutral
Risk Profile Unlimited
Reward Profile Limited
Breakeven Point 2 Breakeven Points

The Short Straddle (or Sell Straddle or naked Straddle) is a neutral options strategy. This strategy involves simultaneously selling a call and a put option of the same underlying asset, same strike price, and same expiry date.

A Short Straddle strategy is used in case of little volatility market scenarios wherein you expect none or very little movement in the price of the underlying. Such scenarios arise when there is no major news expected until expires.

This is a limited profit and unlimited loss strategy. The maximum profit is earned when, on the expiry date, the underlying asset is trading at the strike price at which the options are sold. The maximum loss is unlimited and occurs when the underlying asset price moves sharply in an upward or downward direction on the day of expiring.

The usual Short Straddle Strategy looks like as below for NIFTY current index value at 18000(NIFTY Spot Price):

Options Strangle Orders
Orders NIFTY Strike Price
Sell 1 Put Option NIFTY18APR18000PE
Sell 1 Call Option NIFTY18APR18000CE

Suppose NIFTY is currently trading at 18000. You don’t expect much movement in its price in near future. The Short Straddle strategy can be implemented by selling 18000 NIFTY Put and 18000 NIFTY Call. The net premium received by selling Put and Call Options will be your maximum profit while the losses can be unlimited if the price moves sharply in either direction.

What about Theta (Time) Decay? 

Theta decay for short straddles is one of the only ways the trade produces a profit, besides volatility contraction. Premium is priced out of ATM options faster than ITM options, so short straddles greatly benefit from time decay. Both legs of the trade, the short call, and the short put, are beneficial to theta decay.

Important Tips for Straddle Selling

Traders should use additional caution when trading short straddles, as it is an undefined risk trade. Although the trade will be delta-neutral open order-entry, large moves in either direction in the underlying can cause significant losses.

In addition, large volatility increases can cause significant losses as well. The most important thing to remember when trading short straddles is that dramatic movements either up or down will significantly harm the position. This is why selling straddles is a common tactic for large low-beta indices that don’t move as much as individual stocks

Long Straddle (Buy Straddle) Options Straddle Strategy

Long Straddle (Buy Straddle)

Strategy Level Beginners
Instruments Traded Call + Put
Number of Positions 2
Market View Neutral
Risk Profile Limited
Reward Profile Unlimited
Breakeven Point 2 Breakeven Points

The Long Straddle (or Buy Straddle) is a neutral strategy. This strategy involves simultaneously buying a call and a put option of the same underlying asset, same strike price, and same expiry date.

A Long Straddle strategy is used in the case of highly volatile market scenarios wherein you expect a big movement in the price of the underlying but are not sure of the direction. Such scenarios arise when a company declares results, budget, war-like situation, etc.

This is an unlimited profit and limited risk strategy. The profit earns in this strategy is unlimited. Higher volatility results in higher profits. The maximum loss is limited to the net premium paid. The max loss occurs when the underlying asset price on expire remains at the strike price.

The usual Long Straddle Strategy looks like as below for NIFTY current index value at 18000 (NIFTY Spot Price):

Options Strangle Orders
Orders NIFTY Strike Price
But 1 Put Option NIFTY18APR18000PE
Buy 1 Call Option NIFTY18APR18000CE

Suppose Nifty is currently at 18000 and due to some upcoming events you expect the price to move sharply but are unsure about the direction. In such a scenario, you can execute a long strangle strategy by buying Nifty Put at 18000 and buying Nifty Call at 18000. The net premium paid will be your maximum loss while the profit will depend on how high or low the index moves.

What about Theta (Time) Decay? 

Theta decay for a long straddle is not beneficial at all. If the underlying asset (like a stock, futures contract, index, etc.) doesn’t move at all before expiration, long straddles will lose money because of premium decay. This means timing is very important. If the underlying asset moves after expiration, it won’t do any good.

Important Tips for Straddle Buying

On the surface, long straddles seem like the perfect options trading strategy. Who knows if a stock is going to move up or down? Chances are, it’s going to move one way or the other…unless it doesn’t. The only way the long straddle options strategy will not be profitable is if nothing happens prior to expiration, or if volatility collapses.

Therefore, long straddles are very interesting trades for volatile markets with large price swings.

 

Comparison: Long Straddle (Buy Straddle) Vs Short Straddle (Sell Straddle or Naked Straddle)

Long Straddle (Buy Straddle) Short Straddle (Sell Straddle or Naked Straddle)
Options Straddle Strategy Long Straddle (Buy Straddle) Options Straddle Strategy Short Straddle (Sell Straddle Or Naked Straddle)
About Strategy The Long Straddle (or Buy Straddle) is a neutral strategy. This strategy involves simultaneously buying a call and a put option of the same underlying asset, same strike price, and same expiry date. A Long Straddle strategy is used in the case of highly volatile market scenarios wherein you expect a big movement in the price of the underlying but are not sure of the direction. Such scenarios arise when a company declares results, budget, war-like situation, etc. The Short Straddle (or Sell Straddle or naked Straddle) is a neutral options strategy. This strategy involves simultaneously selling a call and a put option of the same underlying asset, same strike price, and same expiry date. A Short Straddle strategy is used in case of little volatility market scenarios wherein you expect none or very little movement in the price of the underlying. Such scenarios arise when there is no major news expected until expires.
Market View Neutral Neutral
Strategy Level Beginners Advance
Options Type Call + Put Call + Put
Number of Positions 2 2
Risk Profile Limited Unlimited
Reward Profile Unlimited Limited
Breakeven Point 2 Breakeven points 2 Breakeven points

When and how to use Long Straddle (Buy Straddle) and Short Straddle (Sell Straddle or Naked Straddle)?

Long Straddle (Buy Straddle) Short Straddle (Sell Straddle or Naked Straddle)
When to use it? The strategy is perfect to use when there is market volatility expected due to results, elections, budget, policy change, war, etc. This strategy is to be used when you expect a flat market in the coming days with very little movement in the prices of the underlying assets.
Market View Neutral


When you are not sure on the direction the underlying would move but are expecting the rise in its volatility.

Neutral


When a trader doesn’t expect much movement in its price in near future.

Action
  • Buy Call Option
  • Buy Put Option
  • Sell Call Option
  • Sell Put Option
Breakeven Point 2 break-even points


A straddle has two break-even points.

Lower Breakeven = Strike Price of Put – Net Premium

Upper breakeven = Strike Price of Call + Net Premium

2 Breakeven Points


There are 2 break-even points in this strategy. The upper break even is hit when the underlying price is equal to the total strike price of short call and net premium paid. The lower break-even is hit when the underlying price is equal to the difference between the strike price of short Put and the net premium paid.

Break-even points:

Lower Breakeven = Strike Price of Put – Net Premium

Upper breakeven = Strike Price of Call+ Net Premium

Compare Risks and Rewards (Long Straddle (Buy Straddle) Vs Short Straddle (Sell Straddle or Naked Straddle))

Long Straddle (Buy Straddle) Short Straddle (Sell Straddle or Naked Straddle)
Risks Limited


The maximum loss for the long straddle strategy is limited to the net premium paid. It happens the price of underlying is equal to the strike price of options.

Maximum Loss = Net Premium Paid

Unlimited


There is a possibility of unlimited loss in the short straddle strategy. The loss occurs when the price of the underlying significantly moves upwards and downwards.

Loss = Price of Underlying – Strike Price of Short Call-Net Premium Received

Or

Loss= Strike Price of Short Put – Price of Underlying – Net Premium Received

Rewards Unlimited


There is unlimited profit opportunity in this strategy irrespective of the direction of the underlying. Profit occurs when the price of the underlying is greater than the strike price of a long Put or lesser than the strike price of a long Call.

Limited


Maximum profit is limited to the net premium received. The profit is achieved when the price of the underlying is equal to either the strike price of short Call or Put.

Maximum Profit Scenario Max profit is achieved when one option is exercised. Both Options not exercised
Maximum Loss Scenario When both options are not exercised. This happens when the underlying asset price on expire remains at the strike price. One Option exercised

Pros & Cons of Long Straddle (Buy Straddle) and Short Straddle (Sell Straddle or Naked Straddle)

Long Straddle (Buy Straddle) Short Straddle (Sell Straddle or Naked Straddle)
Advantages Earns you unlimited profit in a volatile market while minimizing the loss. It allows you to benefit from double time decay and earn profit in a less volatile scenario.
Disadvantage The price change has to be bigger to make good profits. Unlimited losses if the price of the underlying move significantly in either direction.
Similar Strategies Long Strangle, Short Straddle Short Strangle, Long Straddle

 

What’s Next?

I hope you enjoyed reading about algorithmic trading strategies.

check out our next blog for Detailed information on Options Strangle Strategy (Short Strangle vs Long Strangle)

 

Disclaimer: All data and information provided in this article are for informational purposes only. Myalgomate™ makes no representations as to the accuracy, completeness, correctness, suitability, or validity of any information in this article and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All information is provided on an as-is basis.

Avatar Of Harsh Kothari

Harsh Kothari

Engaged in the development of Algo Trading Platforms. A self-starter who is keen on driving business through collaboration across functional divisions to deliver best-in-class outcomes for the organization. I am a seasoned product person, and have played pivotal roles in driving growth both in my current and previous organizations by delivering game-changing products. Currently, I am working on building an Algo trading business. info@myalgomate.com | +91 8401718185 www.myalgomate.com

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