Simultaneously selling a call option and a put option on the same underlying security with the same strike price and expiration date to profit from a lack of significant price movement in either direction.
Description:
A short straddle is an 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. 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, both the call option and the put option will be exercised and the trader will suffer a loss. The maximum profit is limited and is equal to the net credit received to enter the position. The maximum loss is unlimited in both directions and is equal to the difference between the underlying security price and the strike price at expiration.
Breakeven:
Leg 1 minus net credit received
Leg 1 plus net credit received
Sweet Spot:
Stock price exactly at the strike price (Leg 1)
Max Profit:
Limited to the net credit received
Max Loss:
Unlimited theoretically if the stock goes up or if the stock goes down limited to leg price minus the net credit received.
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