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What Is The Risk Of A Short Straddle? July 20 2022Stock Market Education

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What Is The Risk Of A Short Straddle?

Options trading is one of the most popular forms of derivative trading. The risk and reward both stand high in it. To protect the capital from higher risk, there are many options trading strategies in the market.  There are different types of strategies that apply to a bullish, bearish or neutral market. In this article, we discuss the short straddle strategy and the risk involved with it.

What is Short Straddle Strategy?

A short straddle is a strategy for the neutral market where volatility expected is low. This strategy has undefined risks and profits are limited. This strategy looks to take the advantage of low volatility, time decay and almost no movement in the price of the underlying asset.

Short Straddle Setup

Setting up a short straddle strategy is very straightforward. In this strategy, you sell the at the money call money and put option. It is a net credit strategy in which you receive a premium in the account for selling at the money options. For example, the Nifty is trading at 15980, so 16000 would be the strike at the money. Now to frame a short straddle strategy you will have to sell the ATM call option and put option of a 16000 strike price to collect the premium.

Risks Involved in Short Straddle

The short straddle strategy is profitable till the time market stays within the breakeven point. As soon as the market moves away from the breakeven point the losses increase. The two breakeven points on either side are equidistant from at the money options. So you must be always careful when the price starts moving away from the breakeven point. It is best to avoid short strangles when there is an event or some news flow is expected.

Conclusion

Options trading is meant for those who are skilled and have the required knowledge. A short straddle strategy is a good strategy when there is almost no movement in the market but if caution is not maintained the losses can be high. So it is always better to manage the risk well in a short strangle strategy as the losses are unlimited. However, if the risk is managed well, the profits in this strategy are good.

If you are new to the market or want to learn more about options trading, you may get in touch with Indira Securities. Our experts will help you in options trading and help you learn about it. You may even consider opening a demat account with us and follow our research calls* for trading in options. Contact us via call or email to know more about the services we offer. 

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3. Pay 20% upfront margin of the transaction value to trade in cash market segment.

4. Investors may please refer to the Exchange's Frequently Asked Questions (FAQs) issued by NSE vide. Circular No. NSE/INSP/45191 dated: July 31, 2020 and NSE/INSP/45534 and BSE vide Notice No. 20200731-7, dated: July 31, 2020 and 20200831- 45 dated: August 31, 2020 and dated: August 31, 2020 and other guidelines issued from time to time in this regard.

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6. Risk disclosures RISK DISCLOSURES ON DERIVATIVES:

  • 9 out of 10 individual traders in equity Futures and Options Segment, incurred net losses.
  • On an average, loss makers registered net trading loss close to ₹ 50,000.
  • Over and above the net trading losses incurred, loss makers expended an additional 28% of net trading losses as transaction costs.
  • Those making net trading profits, incurred between 15% to 50% of such profits as transaction cost

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