# Short Straddle

**Short 1 put.****Short 1 call at the same strike and date.**

<*Risk chart of short straddle retrieved from OptionStrat*>

*This directionally-neutral strategy can be VERY DANGEROUS because its potential risk is unlimited if the market rips upward. You would not want to attempt this unless you would be willing to take on the equivalent risk of being short 100 shares per options contract and also the risk of being long 100 shares. A short straddle has severe risk in both directions. *

A trader would use a short straddle if anticipating low **realized volatility** (actual moves) by expiration or an imminent drop in **IV (implied volatility)** for early profit capture. A **straddle**, whether long or short, is generally considered to be the cleanest way for retail to express a view on **volatility**, given the vanilla options available to them. A short straddle might be used when expecting a contained or decreasing level of volatility, such as when in positive market **gamma**. Conversely, a trader might consider opening a long straddle (a long put and long call at the same strike) if expecting an increase in volatility, such as underneath the **Volatility Trigger™**.

## All Levels: Risk Awareness

** This strategy should be used with caution even by seasoned traders **(for example having at least one year of solid options trading) given how dangerous it can be and how important it is to manage the risk well. What is characteristic of the straddle is that it is one of the most direct ways to trade volatility with vanilla retail options. It has a smaller target, but more padding against large RV moves with a higher total credit.

## Expert: Strategy Example

Short straddles are much safer when managed, such as using conditional **delta** hedges with **stop-limits** so that risk stays defined [limited]. Even with expert dynamic hedging measures, this strategy still has very high risk (especially if held overnight). We caution you instead to favor a fundamentally safer strategy like an iron butterfly or an iron condor because structurally it will limit your max losses. At the very least, please be careful with size on a strategy like this; one lot should be fine even on a large account.

With even a single lot and well-tested risk management methods, it *can* be lucrative to use short straddles during extreme volatility. If IV is correlating from the **spot** underlying as a melt-up, then a short straddle can be set up with very long-term options (LEAPS) so that there’s sufficient time for the unreasonably high IV to drop. ** This is about as dangerous of a strategy as it gets** since a short straddle (or a short strangle) has extreme risk on both sides. Therefore, even with a rather large account it might be prudent to restrict this strategy to one lot, and also to have stop-limits on the underlying security in place for mechanical delta hedging.

If a trader is determined to increase size on a position like this, it might be more prudent to increment with similar but defined risk by overflowing into credit iron condors, and also staggering the strike location and the date, such as across different months.

**delta**: A first-order Greek that measures the sensitivity of an option's price to directional movement in the underlying security. Factoring out nonlinear dynamics, the instantaneous value of one delta is worth one share of a stock. This means that if the option on a stock is 40 delta, such as a 40 delta long call or a 40 delta short put, then instantaneously it has the same profit/loss dynamics of being long 40 shares.

**gamma**: A second-order Greek which compares changes in delta (directional exposure) to changes in the underlying. In general, gamma means the *acceleration *of directional exposure. Gamma is also one of the main properties of an option: All long options are long gamma. In a way, gamma is thought of as the magic of options because the size of directional exposure (delta) increases as it is right about direction (therefore increasing profits), and it *decreases *when it is wrong about direction (therefore decreasing losses). But the cost for this magic is time decay. The connection to market makers is that when they are long gamma (market gamma is positive) then they trade against the direction of the trend to lock in profits after they have favorable moves with increased size thanks to gamma. This is why positive market gamma tends to create an environment of reduced or *reducing *realized volatility (smaller overall price moves).

**IV (implied volatility)**: The expected percentage range over a year with 68.3% confidence. This is based on options pricing at one standard deviation. Long options benefit from increases in implied volatility and short options benefit from decreases in implied volatility. In general, when implied volatility increases it means that the expected percentage range is getting larger. When implied volatility is applied to lengths of time other than one year, then this is called the expected move.

**RV (realized volatility)**: Shows the actual trading range of how much a stock is moving over a specific period. It is calculated based on historical movements, and measures the standard deviation, which means about how far it can be expected to move with a 68.3% chance. Another way to look at it is that 68.3% of historical moves would have fallen under what is measured as a standard deviation. Realized volatility can be applied to any length of time. It can also be used as a forecast of future [realized] volatility.

**security**: Any investment product that can be traded on an exchange, such as but not limited to stocks, futures, ETFs, options, bonds, mutual funds, and treasuries.

**spot**: The immediate delivery price of an underlying security. Shares are always considered the spot price, while options are a derivative of that. We also referred to index prices as spot—in contrast to futures or options on them.

**stop limit**: In trade management, a stop limit is a limit order that makes a transaction to open or close a trade only if at the same price or better as the limit order price. A stop limit order has two parts: first a trigger is hit if the price breaches a price point (as is true with all stop orders) and second it has a limit order to guard the execution, which is the worst fill price allowed. If used to close a trade, then this is limiting a loss if there is a price available in the range between the stop order trigger and the limit order. There is risk with a stop limit order in that if a stock gaps downward and there is no liquidity, you may not have an execution, and experience higher losses as you remain fully exposed to your position. Stop orders are safer in general than stop limit orders if it is necessary that a stop gets filled at all costs.

**straddle**: A vertical option strategy which is long a call and long a put at the same strike (long straddle) or that is short a put and short a call at the same strike (short straddle). For retail traders, this is arguably the cleanest way to trade volatility (changes in the percentage range of a security) directly.

**strike**: The price that an option is based on. A long call will expire worthless if the price of the underlying security finishes underneath the strike price, and a long put will expire worthless if the underlying finishes above the strike price.

**underlying**: A reference to the immediate price of the underlying security. This is also sometimes called spot (the spot price of the underlying). The spot price is in contrast to derivatives which have option prices or [forward] futures prices.

**volatility**: When we say volatility in trading, we usually mean either implied volatility (IV) or realized volatility (RV). Volatility-sensitive trades have the extra dimension of not only needing to be right about price, but also needing to be right about how *quickly *price can move (or not move) compared to what the market is pricing in. In many ways, volatility means the speed of market movement; volatility traders will make bets on whether prices will move faster or slower than expected. The overlap between IV and RV is that they are based on one standard deviation moves (68.3% confidence). Also, the slang “vol” is usually considered a reference to IV, especially as “event vol”. For clarity, it is usually helpful to specify explicitly whether we mean IV or RV.

**VT (Volatility Trigger™)**: The VT is our proprietary indicator which detects the level below which we expect bearish feedback loops (chain reactions) to start kicking in. Above this level we expect bullish flows that lead to relatively lower market volatility. Underneath the VT, realized volatility (the expected percentage range over a period of time based on historical data with 68.3% confidence) is modeled to expand significantly. In the Equity Hub™, a similar calculation is used for what is called the Hedge Wall.