Sell or Short Straddle is the opposite of Buy Straddle. It is used when the investor is expecting underlying to show no large movement. Investor expects the underlying to show little volatility Upside or Downside.
This strategy involves Selling a Call as well as Put on the same underlying for the same maturity and Strike Price. It creates a net income for the investor.
If the underlying 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 underlying moves in either direction, up or down significantly, the investor’s loss can be unlimited.
This is a risky strategy and should be carefully adopted only when the expected volatility in the market is limited.
Investor View: Neutral direction but expecting little volatility in underlying movement.
Reward: Limited to the premium received.
Lower Breakeven: Strike Price – net premium received.
Higher Breakeven: Strike Price + net premium received.