When we create a short straddle, we do so with a feeling that the market will not show any major movements. To create this strategy the investor sells one call option and a put option on the same stock for the same stock price and expiry. If the stock does not show any major movement in either direction, the options will not be exercised and the option writer will retain the premium as his profit. The profit here is limited to the premium received but the risk is unlimited.
Upper Break even Point = Strike Price of Short Call + Net Premium Received
Lower Break even Point = Strike Price of Short Put – Net Premium Received
Short Straddle Chart: In the above figure, we have underlying price on the ‘X’ or the horizontal axis and Payoff/profit on the ‘Y’ or the vertical axis.
|Nifty index||Current Value||11700|
|Call and Put||Strike Price (Rs)||11750|
|Received||Total Premium (Call + Put) (Rs.)||207|
|Break Even Point(Rs.)*||11957|
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