Short Straddles

This chapter discusses short straddle, which consists of two legs, a short call and a short put with the same strike and from the same series. Selling a straddle involves selling both options simultaneously. The chapter presents an example of selling at-the-money straddles and shows how and why one might sell straddles away from the money. The driver behind a short straddle is a view on volatility, specifically, a view that market volatility is currently too high and that the options are currently overpriced. The payoff of the short straddle upon expiry and the value of the straddle between the trade date and expiry are considered and how a short straddle would be affected by the underlying, time, and volatility are discussed. Selling straddles allows us to exploit a view that the underlying will not move significantly, that the underlying would remain roughly where it is at present.