Short Option Straddle - Short Call and Put, Straddle

One of the option set ups on the Series 7 is selling or shorting straddles. A short straddle is very risky. It involved selling a call and a put on the same stock - usually with the same strike price and expiration month.

This strategy is most profitable when the investor expects the market to remain stable and thus both the call and put will expire worthless. No movement is what a trader wants. The goal is to short the options, collect the premiums and hope the options expire worthless.

Since selling a call short and selling a put short carries an obligation if the options are exercised, the investor has large or unlimited loss potential here. A writer or seller of a call option - whether in a straddle or not, if unprotected is obligated to purchase the stock (in a rising market) and selling it at the strike price (which will be lower). The person on this end of the straddle will lose money and in the case of the call option - an unlimited amount.

The Put also carries a large loss exposure, only this comes from the bottom side of the short straddle market. If the market declines below a certain point and the put is exercised, the investor is obligated to purchase the stock at the higher strike price while the real market for the stock is lower or even worthless.

This is one reason why short option straddle positions are the most risky in the market. On the Series 7 exam, options are an important section. Knowing the risks and rewards of the multiple strategies like Straddles, Spreads and Stock with options can make the difference between passing and failing.

Recommended Reading:

Option Volatility & Pricing: Advanced Trading Strategies and Techniques