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neutral strategies

Short Straddles

Analyzing the risk profile of a short straddle
Which of these is a short straddle?
Sell a 35 put, Sell a 35 call
Correct! You have sold a short put and short call at the same strike to form a short straddle
Sell a 35 put, Sell a 40 call
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Sell a 40 put, Buy a 40 call
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Buy a 40 put, Buy a 40 call
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XYZ is trading for $50 and you sold a straddle for $3.50. What is your max profit potential?
$50
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$53.50
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$350
Correct! The most you can make on a straddle is the amount you sell it for ($3.50 multiplied by 100 shares)
Not enough info to know
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XYZ is trading for $50 and you sold a short straddle for $3.50. What is your max loss?
$350
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$5000
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Unlimited
Correct! There is no theoretical limit to the amount you can lose on a short straddle. Trade cautiously.
Not enough info to know
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Which of these is might be a bullish short straddle?
Short ATM put, short ATM call
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Short ATM put, long ATM call
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Short OTM put, short ITM call
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Short ITM put, short OTM call
Correct! As long as the put and call have the same strike, this fits the criteria for a bullish straddle. We can tell the peak of the straddle would be above the current share price by the fact that the put is ITM and the call is OTM.
XYZ is trading for $35 and you have the 40 short straddle. Which option has intrinsic value?
The Put
Correct! Since XYZ is trading for lower than our strike, we know the put is currently in the money. That means it holds intrinsic value ($5 of it). The call is out of the money so any value it has is pure extrinsic value.
The Call
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XYZ is trading for $50. You sold the 53-strike short straddle for $4.50. How much of that credit is extrinsic value?
$4.50
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$1.50
Correct! We know the spread has $3 of intrinsic value by subtracting $50 fro m$53. The remainder is $1.50 of extrinsic value.
$3
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No way to determine
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XYZ is trading for $50. You sold the 50 short straddle for $2.50. What are your break-evens?
$50, $52.50
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$47.50, $52.50
Correct! We calculate the lower break-even by subtracting the credit from the strike: $50 - $2.50 = $47.50. The upper break-even is calculated by adding the credit to the strike: $50 + $2.50 = $52.50.
$48.50, $52.50
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$48.50, $50
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You are short the 45 straddle and collected a credit of $3.50. XYZ expires at $46.50. What is your final P/L?
$2 Profit
Correct! You collected $3.50 and your straddle expired with $1.50 of intrinsic value ($46.50 - $45 = $1.50). Subtract the intrinsic value from the credit received to find the final P/L: $3.50 - $1.50 = $2 profit
Max Profit ($3.50)
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$3.50 Loss
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$1.50 Loss
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You are short the 45 straddle and collected a credit of $3.50. XYZ expires at $51.50. What is your final P/L?
$3.50 Loss
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$6.50 Loss
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$2 Loss
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$3 Loss
Correct! Your upside break even is $48.50 ($45 + $3.50 = $48.50). Since XYZ moved beyond $48.50, you have taken on loss: $51.50 - $48.50 = $3 Loss

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neutral strategies
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