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Short Straddle Payoff and BreakEven Points
This page explains short straddle profit and loss at expiration and the calculation of its breakeven points.
Short Straddle Basic Characteristics
Short straddle is nondirectional short volatility strategy. It is composed of a short call option and a short put option, both with the same strike price and expiration date – which is the inverse of long straddle (long call + long put).
Short straddle has limited potential profit, equal to the premium received for selling both legs, and unlimited risk. As a short volatility strategy it gains when the underlying doesn’t move much and it loses money as the underlying price moves further away from the strike price to either side.
We will illustrate the profit and loss profile and the various scenarios on an example.
Short Straddle Example
We will use the same options that we have used in the long straddle example – the only difference is that now we are selling them rather than buying. A short straddle position is the exact other side of a long straddle trade.
Let’s set up our short straddle with the following two transactions:
Sell a $45 strike put option for $2.85 per share.
Buy a $45 strike call option with the same expiration date for $2.88 per share.
Like with a long straddle, the strike closest to the current underlying price is typically selected, unless the trader has a directional bias.
Initial cash flow from this trade, assuming one contract for each leg, is $285 received for the put plus $288 received for the call, which is $573 in total. More generally:

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Initial cash flow = put premium received + call premium received
Maximum Profit
Because we are short both options, there is no way to earn more than the premium received in the beginning – it can only get worse. The objective of a short straddle trade is to defend the premium received.
Because the call and the put have the same strike price, as soon as the underlying price moves a cent away from that strike, one of the options will have positive intrinsic value – which is our loss, as we are short.
The best case scenario is that underlying price ends up exactly at the strike price at expiration. In such case both the options expire worthless, there are no additional losses from option assignments, and the trade’s total profit equals the initial cash flow, or $573 in our example.
Maximum profit from a short straddle equals premium received. It applies only when underlying price ends up exactly at the strike price at expiration.
If Underlying Goes Up
If underlying price ends up above the strike at expiration, the short call is in the money and total profit declines as underlying price rises.
For example, with the underlying at $48.50, the call option’s value at expiration is $48.50 – $45 = $3.50 per share = $350 for one contract. This is more than premium received for the option in the beginning ($288), so the call alone makes a loss of $62. However, the put is out of the money and by itself makes a profit equal to premium received for it, or $285. Combining the two legs, the short straddle makes a profit of $223.
If underlying price end up much further above the strike, the call option’s value exceeds premium received for both options and the trade’s total P/L turns to a loss. For example, with underlying price at $57 the call option’s value is $1,200 and total P/L is $573 – $1,200 = – $627, a loss.
When underlying price ends up above the strike at expiration, total P/L declines as underlying price rises and equals the difference between premium received for both options and the call option’s value.
P/L above the strike = premium received – call value
P/L above the strike = premium received – (underlying price – strike)
If Underlying Goes Down
The same logic applies when underlying price ends up below the strike price, only the contributions of the two legs are reversed. The call is out of the money and expires worthless. The put is in the money and the further below the strike, the higher its value and the lower the total P/L.
For example, with underlying price at $41, the put option’s value is $400, which is still less than premium received for both options, therefore total P/L is a profit of $573 – $400 = $173.
If underlying price drop to $32, the short put’s value is $1,300 and total P/L is a loss of $573 – $1,300 = – $727.
When underlying price ends up below the strike at expiration, total P/L decreases proportionally to underlying price and equals the difference between premium received for both options and the put option’s value.
P/L below the strike = premium received – put value
P/L below the strike = premium received – (strike – underlying price)
Maximum Loss below the Strike
While potential loss is unlimited above the strike, as for most underlyings there is no theoretical limit on how high their prices can go, below the strike underlying price typically can’t get below zero. As a result, maximum possible loss below the strike is limited, although usually very large.
Maximum loss below the strike = strike – premium received
In our example, it is $45 – $5.73 = $39.27 per share = $3,927 per contract.
Short Straddle BreakEven Points
When considering a potential short straddle trade, it is useful to know where exactly the total P/L turns from profit to loss and how wide the profit window is. There are two breakeven points – one above the strike and one below. Their distance from the strike is the same and equal to premium received for both options.
B/E #1 = strike – premium received
B/E #2 = strike + premium received
B/E #1 = $45 – $5.73 = $39.27
B/E #2 = $45 + $5.73 = $50.73
You can see that the lower breakeven price is equal to maximum possible loss on the downside.
If you have seen the long straddle payoff tutorial, you can also see the breakeven points are exactly the same. This is not surprising, as long straddle and short straddle are just the other side of one another.
Short Straddle Payoff Summary
Below you can find a short straddle payoff diagram (blue line) and contributions of individual legs – the short call (red) and the short put (green).
Maximum profit is exactly at the strike ($45).
Below the strike P/L declines proportionally to underlying price, thanks to the rising value of the short put.
Above the strike P/L decreases as underlying price grows, thanks to the rising value of the short call.
Similar Option Strategies
We already know that short straddle is the other side of long straddle, which is a nondirectional long volatility strategy.
Short straddle payoff is similar to short strangle. The difference is that in a short strangle the call strike is higher than the put strike and as a result maximum profit applies for any underlying price between the two strikes. Other things being equal, maximum profit of a short strangle is smaller than maximum profit of a short straddle, because the options you sell are typically out of the money. Nevertheless, thanks to the gap between strikes, the window of profit between the two breakeven points is actually wider with a short strangle, making it a slightly more conservative trade than a short straddle.
With the above said, both short straddle and short strangle are quite risky trades. When not carefully managed they can result in large losses if underlying price makes a big move. To limit the potential losses, you can buy an out of the money call and an out of the money put as hedging. This will reduce net premium received and thereby maximum profit, but it will also protect you from large moves. This strategy (short straddle hedged with a lower strike long put and a higher strike long call) is known as iron butterfly. In the same way, iron condor is a hedged version of short strangle.
How to make Profit in a Neutral Market: Short Straddle Option Strategy
A Short Straddle strategy is a race between time decay and volatility. Every day that passes without movement in the underlying assets will benefit this strategy from time erosion. Volatility is a vital factor and it can adversely affect a trader’s profits in case it goes up.
When to initiate a Short Straddle Options Trading Strategy?
A short options trading straddle strategy can be used when you are very confident that the security won’t move in either direction because the potential loss can be substantial if that happens. This strategy can also be used by advanced traders when the implied volatility goes abnormally high for no obvious reason and the call and put premiums may be overvalued. After selling straddle, the idea is to wait for implied volatility to drop and close the position at a profit. Inversely, this strategy can lead to losses in case the implied volatility rises even if the stock price remains at same level.
How to Construct a Short Straddle Options Trading Strategy?
A short straddle is implemented by selling atthemoney call and put option of the same underlying security with the same expiry.
Strategy  Sell ATM Call and Sell ATM Put 

Market Outlook  Neutral or very little volatility 
Motivation  Earn income from selling option premium 
Upper Breakeven  Strike price of short call + Net Premium received 
Lower Breakeven  Strike price of short call + Net Premium received 
Risk  Unlimited 
Reward  Limited to Net Premium received (when underlying assets expires exactly at the strikes price sold) 
Margin required  Yes 
Let’s try to understand with an example:
Nifty Current spot price  Rs. 8800 
Sell ATM Call & Put(Strike Price)  Rs 8800 
Premium received (per share) Call  Rs 80 
Put  Rs 90 
Upper breakeven  Rs 8970 
Lower breakeven  Rs 8630 
Lot Size(in units)  75 
Suppose, Nifty is trading at 8800. An investor, Mr. A is expecting no significant movement in the market, so he enters a Short Straddle by selling a FEB 8800 call strike at Rs 80 and FEB 8800 put for Rs 90. The net upfront premium received to initiate this trade is Rs 170, which is also the maximum possible reward. Since this strategy is initiated with a view of no movement in the underlying security, the loss can be substantial when there is significant movement in the underlying security. The maximum profit will be limited to the upfront premium received, which is around Rs 12750 (170*75) in the example cited above. Another way by which this strategy can be profitable is when the implied volatility falls.
For the ease of understanding, we did not take into account commission charges. Following is the payoff chart and payoff schedule assuming different scenarios of expiry.
The Payoff Chart:
The Payoff Schedule:
On Expiry NIFTY closes at  Net Payoff from Call Sell (Rs)  Net Payoff from Put Sell (Rs)  Net Payoff (Rs) 

8300  80  410  330 
8400  80  310  230 
8500  80  210  130 
8600  80  110  30 
8630  80  80  0 
8700  80  10  70 
8800  80  90  170 
8900  20  90  70 
8970  90  90  0 
9000  120  90  30 
9100  220  90  130 
9200  320  90  230 
9300  420  90  330 
Impact of Options Greeks:
Delta: Since we are initiating ATM options position, the Delta of call and put would be around 0.50.
8800 CE Delta @ 0.5, since we are short, the delta would be 0.5.
8800 PE Delta @0.5, since we are short, the delta would be +0.5.
Combined delta would be 0.5+0.5=0.
Delta neutral in case of Short Straddle suggests profit is capped. If the underlying assets move significantly, the losses would be substantial.
Gamma: Gamma of the overall position would be Negative.
Vega: Short Straddle Strategy has a negative Vega. Therefore, one should initiate Short Straddle only when the volatility is high and expects to fall.
Theta: Time decay is the sole beneficiary for the Short Straddle trader given that other things remain constant. It is most effective when the underlying price expires around ATM strike price.
How to manage risk?
Since this strategy is exposed to unlimited risk, it is advisable not to carry overnight positions. Also, one should always strictly adhere to Stop Loss in order to restrict losses.
Short Straddle Screener
Stocks: 15 20 minute delay (Cboe BZX is realtime), ET. Volume reflects consolidated markets. Futures and Forex: 10 or 15 minute delay, CT.
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About Short Straddle
A short straddle position consists of a short call and short put where both options have the same expiration and identical strike prices. When selling a straddle, risk is unlimited. Max Profit is limited to the net credit received (premium received for selling both strikes). The strategy succeeds if the underlying price is trading between the downside break even (strike minus net credit) and upside break even (strike plus the net credit).
The screener results are initially sorted by descending “Break Even Probability.”
Options information is delayed a minimum of 15 minutes, and is updated at least once every 15minutes throughout the day. The screener displays probability calculations based on the delayed stock price at the time the strategy is updated.
Main features of the Screener include:
 Ability to add various filters, with hundreds of different combinations.
 Save a Screener: When you’ve defined filters that you want to use again, save the screener.
 Load a Saved Screener: Select a previously saved set of Screener filters to view today’s results.
 View the Results using Flipcharts: Page through charts of the symbols on the results page.
 Download the Results: Download up to 1000 results to a .csv file. The Download will also pull all of the data fields present on the View you use. Barchart Premier Members may download up to 100 .csv files per day.
 Send an EndofDay Email of a Screener’s Results: Barchart Premier Members can save a screener, and opt to receive 10, 25, or 50 results via email along with an optional .csv file of the top 1000 results. Emails are sent at 4:45pm CT Monday thru Friday.
Filters
Barchart Premier subscribers can add or modify different filters on the screener to find calls on the most favorable stock options.
Reordering Filters
Once filters are added, you may drag and drop them in the SET FILTERS tab to reorder the way they appear on the RESULTS tab (when using the Filters View). Each filter you add has the “Order” icon which is used to reposition it.
So you can focus on the best options, the screener starts by removing certain options:
 Days to Expiration (both monthly and weekly expirations) is 60 days or less
 Last Trade was made within the last 2 sessions
 Security Type is only Stocks
 The BreakEven Probability is greater than 25%
 The Stock Price is greater than $1.00
 The Options Volume for both legs must be greater than or equal to 100
 Open Interest for both legs must be greater than or equal to 100
 Bid Price for both Leg 1 and Leg 2 is greater than 0.05
 Delta Leg 1 is between 25% to 75%
 Delta Leg 2 is between 75% to 75%
 Net Delta is between 10% and 10%
In addition, the option must not be an “adjusted” option (the option cannot be based on a split stock).
Note: “Restricted options” (options quotes marked with an asterisk * after the strike price, and found on an individual symbol’s options page) are automatically removed from the screener. A “restricted option” is typically created after spinoffs or mergers, and are not tradeable.
Probability Calculation
We take the underlying stock price, the break even point (target price), the days to expiration, and the 52week historical volatility, and then use those figures in this formula. Depending on the strategy, we use the above or below probability (i.e., the probability the price crosses the break even point).
P_{above} = N(d)
P_{below} = 1 – N(d)
where
N(d)= x if d > 0
= (1x) if d and
d = 1n(b/l) / v√t,
y = 1/(1 + 0.2316419d),
z = 0.3989423e – (d*d)/2,
x = 1 – z(1.330274y⁵ – 1.821256y⁴ + 1.781478y³ – 0.356538y² + 0.3193815y)
and
b = break even point
l = last price
v = 52week historical volatility
t = days to expiration
e = 2.71828
Views
The Results page contains three standard views. You may switch the view using the links at the top of the screener results table. The Main View shows the Volume and Open Interest for each option, while the Dividend & Earnings View can be used to highlight strategies with upcoming dividends and earnings. The Filter view shows you the data contained in the field(s) you’ve added to the screener.
Main View
 Stock Symbol – the underlying equity. Clicking on the symbol will take you to the current quote page.
 Last – the delayed stock price at the time the strategy is updated for the underlying equity.
 Exp Date – the expiration date of the option
 Leg 1 (Call): Strike, Delta
 Leg 2 (Put): Strike, Delta
 Net Cr/Db – the maximum profit on the spread
 % of Stock – the percentage of the premium in relation to the underlying price of the stock
 Avg IV – the average implied volatility of the calls and puts immediately above and below the underlying price.
 BE – the lower limit necessary for the strategy to break even (Leg2 Strike minus Net credit/debit)
 +BE – the upper limit necessary for the strategy to break even (Leg1 Strike plus Net credit/debit)
 Probability – the probability that the underlying is trading at or within the two break even points at expiration.
Dividend & Earnings View
 Dividend – the dividend the equity pays on the ExDividend Date. On the morning of the Dividend ExDate, the stock’s price is lowered by the amount of the dividend that was just paid.
 Dividend ExDate – the first day on which the stock trades without the dividend. If you wish to receive the dividend, you must own the stock by the close of market on the day before the Dividend ExDate. Many times, a covered call is exercised early so the buyer can own the stock and collect the dividend. This typically happens to ITM options the day before the Dividend ExDate.
 Earnings Date – The date on which a company is expected to release their next earnings report. The prices are more volatile, which tends to inflate the prices of the nearthemoney strikes. During a contract period when there is an earnings report due, the earnings announcement can dramatically shift the range in which the stock has been trading.

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