Short Straddle Options Strategy: Beginner's Guide

💡 Short Straddle Strategy: Pro Takeaway

The short straddle is a premium seller's dream and a risk-averse trader's nightmare. I've been trading options for twenty years and still haven't found the courage to sell a straddle. But for those of you with a healthy risk appetite, here's how this market-neutral trade works:

The trade involves selling two options: a call and a put, both at the same strike price and with the same expiration cycle. There's no hedge here—no long option to offset the risk. That means unlimited risk if the stock rallies, and significant downside risk if it tanks.

Let's say ABC is trading at $100. You don't expect much movement, so you sell the 100 strike call and the 100 strike put for a combined credit of $4. If ABC finishes at $100 at expiration, you keep the full $4 ($400 per contract). But that rarely happens. About 99.9% of the time, one of the legs finishes in the money.

That means you'll hardly ever walk away with the full premium. The real question is: how much of it may you keep, and how much can you lose? For example:

• If ABC closes between $96 and $104, you still walk away with a partial profit.
• Anything above $104 or below $96 starts eating into your gains.
• If ABC rallies to $120, you lose $16, or $1,600.
• If it drops to $85, you lose $11, or $1,100.

In this article, we'll walk through everything you need to know about the short straddle—when to trade it, how to manage it, and what to watch out for if things go south.