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Short Straddle Options Strategy
A short straddle options strategy can result in a nice cash flow when applied to an equity that is trading sideways. A short straddle options strategy is when a trader sells both a call and a put on a stock, commodity future, or Forex currency. Both call and put should have the same options expiration dates. The prize in the case of a short straddle options strategy is the premiums on both the call and the put. As in all options trading, those who engage in a short straddle options strategy need to pay close attention to both the fundamentals that drive equity prices and technical factors that help the trader read market sentiment. Over the long term, smart traders tend to make more money on selling calls and puts than on buying them. However, options sellers forego the occasional jackpot that comes from hitting a home run when buying a well chosen call or put. They also run the risk of an occasional huge loss as they are trading short in which case the leverage of options trading works against them.
Quiet Times versus Volatile Markets
A short straddle options strategy is best adapted to a quiet market. However, premiums are typically higher in volatile markets. The advantage of accepting a lower premium and only trading in a so called flat market is that the risk of loss is less. The risk of a short straddle options strategy in a volatile market typically keeps those without deep pockets out of the market.
Actively Trading a Short Straddle Options Strategy
This strategy is best used by those making a living trading options. That is to say, a full time day trader will be able to watch the market closely and exit the trade at the most opportune moment, either to maximize profits or limit losses. Selling puts and calls does not mean that the trader needs to stay with the trade until expiration. Rather, he or she can exit either one of both contracts at any time by executing the opposite trade. Most commonly a trader stays with his contracts until such time as the time value of the contract diminishes. If the market price of the equity has not changed he or she can simply let the contracts expire or exit one trade or the other at the most profitable time. If the equity in question moves up in price a smart day trader will be watching and will exit the call contract in order to limit losses. He or she will simply let the put expire as there is little risk of loss. If the equity moves down in price he or she exits the put contract in order to limit loss and leaves the call contact alone. In all cases it is important for those using a short straddle options strategy to follow the market closely. While one can preserve opportunity both ways with a long straddle options strategy, losses are limited to the price of the contracts. If a trader does not pay attention he or she may lose out on opportunity but losses are limited.