← AdvancedLesson 22 · 4:43
Short straddle and strangle (uncovered selling)
Summary
You can build a short straddle and a short strangle, find their break-evens and see the open sides. You can explain how a volatility jump, an overnight gap with a margin call, and a crash hurt an uncovered seller before the last day.
Key terms
- short straddle
- Selling a call and a put at the same strike, paid if the stock sits still, with no limit to the loss on the upside.
- short strangle
- Selling a call and a put at different strikes further out, collecting less than a straddle with the same open sides.
- uncovered (naked) selling
- Selling options with no shares, cash or bought options set aside to cover them, so the broker holds margin.
Check yourself
Answer each question to see why the right answer is right.
1. You sell the $100 call for $345 and the $100 put for $341. Where are your break-evens?
2. The short strangle sells the $105 call and $95 put for $299. Is it safer than the straddle?
3. XYZ ends at $115 or at $85. What happens to the short straddle?
4. Your account holds $4,000 and $2,686 is held. Overnight XYZ opens at $115. Today's line is down $855 and the amount held jumps to $3,841. What happens?
5. On the first day, volatility rises from 30% to 45% and XYZ stays at $100. You are down $342. Why does it hit so hard?
Finished the video and the quiz? .