SHORT STRADDLE
A Short Straddle is the opposite of Long
Straddle. It is a strategy to be adopted when the investor feels the market
will not show much movement. He sells a Call and a Put on the same stock /
index for the same maturity and strike price. It creates a net income for the
investor. If the stock / index does not move much in either direction, the
investor retains the Premium as neither the Call nor the Put will be
exercised. However, incase the stock / index moves in either direction, up
or down significantly, the investor’s losses can be significant. So this is a
risky strategy and should be carefully adopted and only when the expected
volatility in the market is limited. If the stock / index value stays close to
the strike price on expiry of the contracts, maximum gain, which is the Premium
received is made.
When to Use: The investor thinks that the underlying
stock / index will experience very little volatility in the near term.
Risk:
Unlimited
Reward: Limited
to the premium received
Breakeven:
·
Upper
Breakeven Point = Strike Price of Short Call + Net Premium Received
·
Lower
Breakeven Point = Strike Price of Short Put - Net Premium Received
Example
Suppose Nifty is at 4450 on 27th April. An investor, Mr. A, enters into a short straddle by selling a
May Rs 4500 Nifty Put for Rs. 85 and a May Rs. 4500 Nifty Call for Rs. 122. The
net credit received is Rs. 207, which is also his maximum possible profit.
Strategy
: Sell Put + Sell Call
|
Nifty index
|
Current Value
|
4450
|
|
|
|
|
|
Call and Put
|
Strike Price (Rs.)
|
4500
|
|
|
|
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Mr. A receives
|
Total Premium
|
207
|
|
|
(Call + Put) (Rs.)
|
|
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Break Even Point
|
4707(U)
|
|
|
(Rs.)*
|
|
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(Rs.)*
|
4293(L)
|
* From buyer’s point of view
The
payoff schedule|
On expiry Nifty
|
Net Payoff from Put
|
Net Payoff from Call
|
Net Payoff
|
|
|
closes at
|
Sold (Rs.)
|
Sold (Rs.)
|
(Rs.)
|
|
|
|
|
|
|
|
|
3800
|
-615
|
122
|
-493
|
|
|
|
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|||
|
3900
|
-515
|
122
|
-393
|
|
|
|
|
|||
|
4000
|
-415
|
122
|
-293
|
|
|
|
|
|||
|
4100
|
-315
|
122
|
-193
|
|
|
|
|
|||
|
4200
|
-215
|
122
|
-93
|
|
|
|
|
|||
|
4234
|
-181
|
122
|
-59
|
|
|
|
|
|||
|
4293
|
-122
|
122
|
0
|
|
|
|
|
|||
|
4300
|
-115
|
122
|
7
|
|
|
|
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|||
|
4400
|
-15
|
122
|
107
|
|
|
|
|
|||
|
4500
|
85
|
122
|
207
|
|
|
|
|
|||
|
4600
|
85
|
22
|
107
|
|
|
|
|
|||
|
4700
|
85
|
-78
|
7
|
|
|
|
|
|||
|
4707
|
85
|
-85
|
0
|
|
|
|
|
|||
|
4766
|
85
|
-144
|
-59
|
|
|
|
|
|||
|
4800
|
85
|
-178
|
-93
|
|
|
|
|
|||
|
4900
|
85
|
-278
|
|
|
|
|
|
|||
|
5000
|
85
|
-378
|
-293
|
|
|
|
|
|||
|
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|
|
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|
The payoff chart (Short Straddle)
+ =
Sell Put Sell Call Short Straddle
