What Is A Covered Straddle? - Fidelity

Put call straddle

Put call straddle


In this strategy, one OTM put with lower strike is sold after buying one OTM put with strike even lower, and one OTM call with higher strike is sold after buying one OTM call with a strike even higher.

How a Straddle Option Can Make You Money No Matter Which

Volatility is a measure of how much a stock price fluctuates in percentage terms, and volatility is a factor in option prices. As volatility rises, option prices tend to rise if other factors such as stock price and time to expiration remain constant. Short option positions, therefore, rise in price and lose money when volatility rises. When volatility falls, short option positions make money. Since a covered straddle has two short options, the position loses doubly when volatility rises and profits doubly when volatility falls.

Call, put, option, strangle, straddle

Options strategies can seem complicated, but that's because they offer you a great deal of flexibility in tailoring your potential returns and risks to your specific needs. One interesting strategy known as a straddle option can help you make money whether the market goes up or down, as long as it moves sharply enough in either direction. The straddle option is a neutral strategy in which you simultaneously buy a call option and a put option on the same underlying stock with the same expiration date and strike price. As long as the underlying stock moves sharply enough, then your profit is potentially unlimited.

Long straddle (video) | Put and call options | Khan Academy

However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade options actively, it is wise to look for a low commissions broker. Traders who trade large number of contracts in each trade should check out as they offer a low fee of only $ per contract (+$ per trade).

Short Straddle (Sell Straddle) Explained | Online Option

Short puts that are assigned early are generally assigned on the ex-dividend date. In-the-money puts, whose time value is less than the dividend, have a high likelihood of being assigned. Therefore, if the stock price is below the strike price of the short straddle, an assessment must be made if early assignment is likely. If assignment is deemed likely and if a long stock position is not wanted, then appropriate action must be taken before assignment occurs (either buying the short put and keeping the short call open, or closing the entire straddle).

Note: While we have covered the use of this strategy with reference to stock options, the long straddle is equally applicable using ETF options, index options as well as options on futures.

Although the short call in a covered straddle position is covered by the long (or owned) stock, the short put, as noted above, is not “covered,” because no cash is held in reserve as it is in the case of a cash-secured short put. In the case of a covered straddle, the account equity including the long stock is used as collateral for the margin requirement for the short put. Therefore, if account equity declines sufficiently, a margin call will be triggered. The covered straddle is suitable only for aggressive investors who are suited to taking this risk.

This is the put version of the bull call spread: ie an amount is paid up front which rises in value should the stock will move in the right particular direction (‘down’, compared to ‘up’ for the bear call spread). For example:

A short – or sold – straddle is the strategy of choice when the forecast is for neutral, or range-bound, price action. Straddles are often sold between earnings reports and other publicized announcements that have the potential to cause sharp stock price fluctuations.


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