Short Straddle
Sell an ATM call and put to collect large premium, betting the market stays near the strike — unlimited risk.
What is a Short Straddle?
A Short Straddle sells an ATM call and an ATM put at the same strike. You collect a large premium and profit if the underlying stays near the strike as both options decay. It is a bet on low volatility and time decay. However, risk is unlimited on both sides — a large move in either direction can produce severe losses. It demands strict risk management and is for experienced traders only.
Payoff Diagram
Profit & Loss at expiry
Per share (multiply by lot size 75). Gold dots mark breakeven points; green = profit, red = loss.
Construction
- Sell 1 ATM Call.
- Sell 1 ATM Put (same strike, same expiry).
- Total premium received = maximum profit.
When to Use It
Use only when you strongly expect the market to stay quiet and IV is high (rich premium likely to fall). Always pair with a strict stop-loss or convert to a defined-risk Iron Butterfly by buying wings.
The Greeks
Delta ≈ 0 at entry, strongly Positive Theta, strongly Negative Vega, Negative Gamma.
Risks & Considerations
- Unlimited losses on a big move — the single most important caveat.
- Negative Gamma means losses accelerate as price trends away from the strike.
- A volatility spike inflates both short legs against you.
- Margin requirements are high and can rise sharply intraday.
Worked Example (Nifty)
Illustrative trade — lot size 75
Nifty 20,000. Sell 20,000 CE ₹200 + 20,000 PE ₹200 = ₹400 credit (₹30,000 max profit). Breakevens 19,600 and 20,400. If Nifty stays at 20,000, you keep ₹30,000. But a crash to 19,000 makes the put worth ₹1,000, loss = (1000 − 400) × 75 = ₹45,000 and rising — hence the need for stops.