In the previous video we discussed a long straddle trade , and the pointers which we need to keep in mind while initiating such a trade to make it profitable one.

In the previous video we discussed a long straddle trade , and the pointers which we need to keep in mind while initiating such a trade to make it profitable one.

The directional movement of the market does not matter in the long straddle, but the pointers to be kept in mind is quite a challenge i.e.

– Volatility ,
– Large moves in the market in either direction and
– Event outcome assessment

getting all of them in our favour at one go is a tough job .

Now think about this – there are quite a few factors which prevent the long straddle to be profitable. So as an extension of this – the same set of factors ‘should favor’ the opposite of a long straddle, i.e the ‘Short Straddle’.

Let us quickly discuss a short straddle strategy , how it is set up and how does the profitability behaves in various scenarios.
Setting up a short straddle is exactly opposite of a long straddle–Instead of buying the ATM Call and Put options (like in long straddle) we sell the ATM Call and Put option.

When you sell ATM options, you receive the premium .

Lets again look in an example.

Nifty Spot is trading at 10360 . We Sell 1 call and 1 put of both 10350 strike price at 111 and 95 premiums respectively. Total premium which we receive is 111+95 = 206. This means , The maximum profit the strategy can generate is 206 . If the Spot price of the underlying remains around this area of 10360 , all the premiums of both calls and puts decay and the entire premium collected becomes the profit. As the underlying moves either up or down , the profits decrease. the trader is cushioned uptill 206 points up and down. So the trader breakevens at 10350 + 206 and 10350 – 206. Beyond which it start incurring losses.

Here, maximum loss is unlimited as price rises or falls, maximum profit = 206, which is total premium received, upper breakeven point = 10556, which is strike price + maximum loss and lower breakeven point = 10144, which is strike price – maximum loss.

The short straddle works opposite to the long straddle. Short straddle works best when markets are expected to be in a range and not really expected to make a large move.
Many traders fear the short straddle strategy considering the fact that short straddles have unlimited losses on either side.

However, in my experience, short straddles work really well if you know the technical levels , volatility and events in mind of the asset .