Short Straddles: Payoff Structure and Unbounded Risk

Summary

The document identifies the position formed by selling a put and a call on the same underlying, with the same strike and expiration, without owning shares, as a short straddle. It distinguishes this from a covered combo, which includes a share position. The answer focuses on the option structure rather than on entry rules or trade management.

A short straddle collects premiums from both options, so its maximum gain is limited to the premium received. If the underlying moves substantially above or below the strike by expiration, losses can grow with the size of the move; the call side has theoretically unlimited loss potential, while the put side’s loss is bounded by the underlying falling to zero. The document cautions that the strategy can be risky when used speculatively, while noting that derivatives can also serve purposes beyond speculation. It gives no payoff diagram, breakeven calculations, volatility analysis, margin requirements, or hedging approach.

Key ideas

• Selling a put and call with the same underlying, strike, and expiration creates a short straddle.
• The position’s maximum gain is limited to the premiums collected.
• Large underlying price moves can cause substantial losses, with theoretically unlimited loss on the short call side.
• The document describes the basic structure and risk but does not cover hedging, margin, or trade management.

Tags

# Strategy to write uncovered put and call


# Strategy to write uncovered put and call












I found a strategy called "covered combo" where you sell 1 put, 1 call, and purchase 100 shares of the underlying; is there a name for doing this without purchasing the 100 shares?

## Answer by skoestlmeier (score 2, accepted)

https://quant.stackexchange.com/a/41678

The strategy you are asking for is called straddle. To be more precise, as you would like to sell one put and one call option, it is a short straddle.

Both options are referring to the same underlying security, strike price and expiration date. Be aware that it is a very risky strategy, as gains are limited and losses are not restricted.

#### Edit

The wikipedia article mentions

> The risk is virtually unlimited as large moves of the underlying security's price either up or down will cause losses proportional to the magnitude of the price move.

I called a straddle a "very risky strategy", which should be true for many (often less informed) private investors, handling around with option-strategies and thus using derivatives in a speculative way. As stated in the comments, a straddle (as any derivative) is also very useful for other purposes than speculating.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.