Short straddle

Summary

A short straddle fits a view that XYZ will sit near $100: you sell the $100 call for $345 and the $100 put for $341, collecting $686, and time works for you. The $686 is the most you can make, and only if XYZ ends right at $100; the loss above has no limit, below it keeps growing until XYZ reaches zero, and you break even at $93.14 or $106.86. In the lesson's drawn crash, you would be down $1,426 today, more than twice the most you can make.

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.

uncovered selling

Selling options without owning the shares or setting the cash aside to back them, so your broker holds margin.

margin

Money your broker holds against what a sold position could lose.

margin call

A broker's demand to add cash or close positions when the cushion runs out; the broker can close them for you.

tent

The curved, peaked shape of a calendar or short straddle on its key date.

drawn crash scenario

The course's example, not a forecast, where XYZ falls from $100 to $80 in 3 trading days and volatility doubles to 60%.

break-even on either side