Short straddle

A short straddle is created by selling a call and selling a put on the same underlying security with the same strike price and the same expiration date. The investor collects two premiums up front and keeps them if both options expire worthless — which happens only when the stock finishes right at the strike price.

The strategy's payoff diagram looks like an upside-down V (a peak) centered on the strike. Maximum gain equals the total premiums received. Breakeven points sit at the strike price plus the combined premium on the upside and the strike price minus the combined premium on the downside. For example, selling a $50 call for $3 and a $50 put for $2 collects $5 total, producing breakevens at $45 and $55; any close between those prices leaves the position profitable.

Short straddles are bets on low volatility — the writer wants the stock to trade sideways. The risk is severe: if the stock surges, the short call carries theoretically unlimited loss, and if the stock collapses, the short put loses all the way down to a stock price of zero. Because of this two-sided exposure, short straddles are considered one of the riskiest basic option strategies and are appropriate only for experienced investors who expect a stable market.

The Series 7, Series 9, and Series 65 exams all test short straddles. Expect questions asking you to compute maximum gain, maximum loss, and both breakeven points from the premiums, to recognize the neutral-market outlook behind the strategy, and to contrast it with a long straddle, which takes the opposite view.