Trading is just one way to earn extra money, but it can be risky if you aren’t sure about how it’s done. The straddle strategy is a more complicated investment option, but it’s still something that you can learn for success in the market. Learn more about short straddles and what you can expect from them.
What Is a Short Straddle Option?
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A short straddle strategy is an approach you can employ when you’re trading if you want a high earnings potential and do not believe that the asset will increase or decrease in price. In this strategy, you would sell two options: a call and a put, with both having the same strike price and expiration date.
Expert traders typically recommend that you first have more experience before trading in short straddles. If you are ready for this next step, many consider it best practice to wait to sell your straddles until you are between earnings reports and other important trading and investor news. The reason for this is that these items can cause unexpected and sharp price changes that can profoundly affect your trading plan.
Maximum Profit With the Short Straddle
You likely developed an interest in trading and investing because of the income potential. Every person’s investing needs are different. Where one individual may feel comfortable with some risk, others play it safe and choose to invest in options that are more likely to produce a solid return that can grow over time.
If you take the short straddle option, the most you can profit is the total premiums you receive minus any commissions you must pay. You’ll earn this maximum profit if you hold on to the straddle until its expiration date and the stock price closes at the strike price. When this happens, both of your options expire worthless, and you keep the premium received.
Maximum Risk With the Short Straddle
Just like any investment, there is some risk involved with the short straddle. While the stock has to fluctuate a lot before you’re set to lose too much money, the maximum risk or loss is unlimited. There are two different loss scenarios:
- If you write a straddle at the strike price of $30 and then the stock price increases, you would still have to sell the straddle at the $30 strike price and buy again in the market for the higher price.
- If the stock price is lower than the strike price, you must buy the stock at the strike price, even though the market price isn’t as high.
Depending on the stock and strike prices, this loss can be substantial, and it’s important to understand more about volatility before choosing to get into straddle options as a strategy.
Short straddles aren’t for everyone, but with the right experience, patience, and knowledge, as well as the willingness to take on some risk, you have the potential for maximum gains that you can then reinvest for another round. Consider the short straddle strategy if you are well-capitalized or willing to watch the market for the best time to make a move.
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