Short Straddle Options Strategy is combination of two strategies we have already discussed. So you need to understand those two for clear understanding of this one. Those two strategies are
But simply selling a Call and Put does not make it long straddle. It has to fulfill two criteria as mentioned below
- Sell Call and Put of same Strike Price
- The Expiry should also be same
- Both the trades should be on same instrument (Index or Stock)
That is you need to sell for same strike price with same expiry then only it will be said Short Straddle. It is just opposite of Long Straddle technique. Like Long Straddle it is also direction independent but the difference is that underlying stock or indices should not be volatile. So it is best used when market and stock is in sideways movement whereas the other one is best in trending market in any one direction.
You can watch either the English Video or Hindi Video to understand the strategy in details.If you are new to Options trading then I would suggest you to watch or read the Getting Started tutorial on Options . That will help you understand the strategies as well. The video explains some key concept like
- When to use the technique
- Profit and loss range of the technique
- Explanation of technique with Nifty example
English Video
Hindi Video
Conclusion
It has limited profit potential but unlimited loss potential. So you should use it with caution and only if the market or stock is in sideways movement and you do not expect any big move in either direction else you will end up making huge loss. This works best in sideways consolidation phase of stock or market. Other techniques pose problems making money in that kind of market but this one is exactly created for that phase of market and should be used accordingly.
It should not be used before Events days as outcome of event may cause good movement in either direction causing you loss. The loss and profit of this technique is exact opposite of Long Straddle technique we talked about in previous article. So you should understand when to use this one versus when to use the previous one.
This technique requires you to sell both Call and Put so you need to have clear understanding of selling call and put. They are bit difficult then buying and requires margin as well (Span margin and Exposure margin). So before using this technique you need to ensure that you have enough funds in account to use the technique else you will have margin shortfall issue.
The technique should be used on Low volatility stocks. Based on last 15 years data you can get details about volatility and beta of all the F&O stocks and Indices like Nifty and Bank Nifty. So you can list out the low volatile stocks to use with this technique. This is exact opposite of the Long Straddle technique so proper understanding of the volatility will help you in both the techniques.