Short Straddle

A put and a call sold at the same strike: the credit is the most that can be gained, and the loss grows without a cap in both directions.

Also called Sold straddle, Naked straddle

Outlook

Neutral

Family

Directional

Level

Expert

Legs

2 legs

Expirations

1 expiration

Opens for

Credit

Maximum profit

Limited

Maximum loss

Unlimited

Legs at the reference strikes this page's diagrams are drawn from

Leg	Side	Contract	Ratio	How the strike is chosen
A	Short	Put 100	1	At the money
A	Short	Call 100	1	At the money

What it is

A call and a put sold at the same strike A, in the same expiration. The credit taken in is the entire maximum gain, and it is kept only if the underlying finishes exactly at A.

It is the long straddle inverted, and the inversion is not symmetric in consequence. The buyer risks a known debit for an unbounded gain; the seller takes a known credit for an unbounded loss, and the fact box marks it Expert for that reason.

The payoff

At expiration

An inverted V with its peak at the strike: the full credit is kept at A and the position loses in both directions away from it.

An inverted V with its peak at A:

• At A — both expire worthless and the full credit is kept.
• Away from A — one leg is in the money and loses dollar for dollar with the move, in either direction, with nothing to stop it.

Break-evens are A plus the credit and A minus the credit. Between them the position makes something; outside them it loses, and the loss above A has no upper bound at all.

How it behaves before expiration

Today, before expiration

Today's value is a smooth curve below the inverted V, with a rounded peak at the strike rather than a sharp point.

The curve sits below the inverted V, and the peak is rounded. The full credit is not realised until expiry, because both sold options still carry time value that has to be bought back or allowed to expire.

Time is the position’s ally here in a way it is not on any long-premium page: the gap between the two lines closes in the seller’s favour, every day that the underlying stays near A.

The Greeks

Delta is near zero at A and turns against the position in whichever direction it moves — negative as the price rises, positive as it falls.

Gamma is negative and large, concentrated at A. This is the defining hazard: delta builds against the position automatically, and faster the closer expiry gets.

Theta is positive and largest at A. Two sold options decay together.

Vega is negative and large. A rise in implied volatility increases what both legs cost to close, independently of where the price is.

Where it lives in the volatility environment

Practitioners describe a short straddle as selling implied volatility: the credit is the market’s price for the move, and the position keeps whatever of that price the underlying fails to use. It is generally discussed alongside the observation that realised volatility can exceed implied without warning, and that the structure’s loss is not bounded when it does.

What can go wrong

• The loss is unbounded on the upside. A gap through A can exceed the credit many times over before anything can be done about it.
• Negative gamma accelerates against the position. The bigger the move, the faster the loss grows, and it is largest near expiry.
• Early assignment on either leg. The put leaves 100 long shares; the call leaves 100 short. Either turns the structure into something else overnight.
• Margin is not the credit. The requirement can rise sharply as the underlying moves, forcing a close at the worst moment.
• Pin risk at A. An underlying that settles almost exactly at the strike leaves assignment on one leg uncertain over the weekend.

Building it in Option Panel

Open Build Strategy and pick Short Straddle. Both legs share one strike, so the builder offers a single strike selection. The order ticket’s direction guard applies: a structure whose derived credit contradicts the quoted band is refused rather than sent.

Back to the encyclopaedia · What-if analysis in the docs

Related strategies

• Short Strangle — the same idea with a range instead of a point, for a smaller credit.
• Iron Butterfly — this position with both wings bought back, which bounds the loss.
• Long Straddle — the other side.