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.