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neutral strategies
Short Straddles
Analyzing the risk profile of a short straddle
Skewed Straddles
In the examples below we see how skewing the strikes – selling a larger delta strike against a smaller delta strike – creates a directional bias in the straddle. Selling a larger-delta put creates a more bullish strategy. Likewise, selling a larger-delta call would create a more bearish strategy.
Bullish-skewed Straddle (+70Δ Put/-30Δ Call)
Below, we have a bullish straddle. We sold the +70Δ put against a -30Δ call, which results in a net +40 deltas. The peak of the straddle is 30 deltas away from the current share price. Our upside break-even also moves sharply higher, but our downside break-even shifts closer to the current share price. We've collected a larger credit than our original neutral straddle which means a greater profit potential.
Bearish-skewed Straddle (+30Δ Put/-70Δ Call)
Now, let's take a look at a bearish straddle. In this case we sold the +30Δ OTM put against a -70Δ ITM call which results in a net -40 deltas. This pushes the peak of the straddle 30 deltas lower than the current share price. The downside break-even shifts lower, and the upside break-even shifts closer to the current share price. Our total credit has increased relative to the original neutral straddle which means we have a greater profit potential.
