Option Strategies Details
Sell 1 ATM Call and Sell 1 ATM Put
1. Speculate on decreasing volatility and a slightly-increasing to slightly-decreasing price
Down
Neutral
Strike Price plus the Premium (credit) received or minus the Premium (credit) received
Theoretically unlimited minus the credit received for selling the Straddle
same as Max Contract Loss
Short Straddle
You sell (short) an ATM Call and sell (short) an ATM Put, both at the same strike
Description
A trader who wants to speculate on a decrease in volatility and a slightly-increasing to slightly-decreasing price can sell (write) a Straddle. The trader receives a credit for the position, called a premium, and has the obligation to either buy 100 shares or sell 100 shares at the strike price.
Suppose stock XYZ is trading at $357. You forecast a decrease in XYZ volatility and a small increase or small decrease in XYZ price.
You sell a $357 Straddle (selling the $357 Call and selling the $357 Put) for a $20 credit to express this view. You have two breakeven prices: either $357 (strike price of both contracts) - $20 (premium received) = $337 or $357 (strike price of both contracts) + $20 (premium received) = $377, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to buy to close at a variety of XYZ prices as the market value of your $357 Straddle changes. Because the price of XYZ can theoretically increase to infinity or decrease down to $0, selling a Straddle carries a high "risk of ruin". This means that an adverse price move in EITHER direction, like a surprise earnings miss or buyout, can cause catastrophic losses.