A short straddle is an options strategy consists of selling both a call option and a put option of the same strike price and expiration date. It is used, when the trader believes the underlying asset, NIFTY or F&O stocks, will not move significantly higher or lower, till expiry of the options contracts. The maximum profit is the amount of premium collected by selling the two options. The potential loss can be unlimited, so it is typically a strategy for more experienced traders. So, this is a trade which is executed in oscillating markets.
The range in which the underlying lies on expiry, is profitable for the option strategy, if between the cumulative premium collected, i.e. ATM strike call option + total premium collected and ATM strike put – total premium (the BEP points). These are the two potential breakeven points at expiration at the strike price plus or minus the total premium collected.
Consider a sell straddle where Nifty Futures Fair value is quoting at 17,558, trader shall
Sell 17550 8 Sep 2022 CE at 184.85
Sell 17550 8 Sep 2022 PE at 179.40
It’s a net credit strategy with premium inflow of about Rs 18,213, as also indicated in the tool of Quantsapp, i.e. sum of the two option premia, which are sold. The expiry payoff is indicated in orange colour. Expiry BEP1 of the strategy is at 17,186 and Expiry BEP2 of the strategy is at 17,914.
The entire option premium collected for the two legs is the maximum profits if Nifty, the underlying, expires at the same level of about 17,558. The maximum profit is limited if Nifty stays between the expiry BEP1 and expiry BEP2.