Covered Short Straddle


A risky income strategy, which involves simultaneously selling a call option and a put option on the same underlying security with the same strike price and expiration date while holding a long position in the underlying security to profit from a lack of significant price movement in either direction.

Description:

A covered short straddle is a complex options strategy that involves simultaneously selling a call option and a put option on the same underlying security with the same strike price and expiration date, while also holding a long position in the underlying security. The strategy is designed to profit from a lack of significant price movement in either direction and is typically used in a neutral market outlook.
The trader profits from the strategy if the underlying security price remains close to the strike price at expiration. If the price of the security moves significantly away from the strike price in either direction before expiration, one of the options will be exercised and the trader will suffer a loss. However, the long position in the underlying security helps to offset the loss. The maximum profit is limited and is equal to the net credit received to enter the position. The maximum loss is limited and is equal to the difference between the price of the underlying security and the strike price at expiration.

 

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