Short Strip Straddle

How does a Short Strip Straddle work in Options Trading?

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Short Strip Straddle - Introduction

The Short Strip Straddle, also known simply as a Short Strip, is a short straddle which writes more put options than call options. As a Neutral Options Strategy, Short Strip Straddles are useful when a stock is expected to stay stagnant but if the underlying stock should breakout, chances are that it will break out to upside. Short Strip Straddles are designed to make a smaller loss when the underlying stock breaks out upwards than if the stock breaks out downwards.

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Main Differences Between Short Strip Straddle and Regular Short Straddle

The main difference between the Short Strip Straddle and the regular short straddle is that Short Strips writes more put options than call options. A regular short straddle writes the same number of at the money put options and call options and has a symmetrical risk graph with equal risk to upside and downside. Short Strip Straddles writes more at the money put options than call options, resulting in a risk graph with steeper loss to downside than upside. This characteristic is especially useful if your opinion on a stock is that it would remain stagnant and if it does breakout, it will be to upside than downside. The upper losing point of a Short Strip Straddle is also further away than the lower losing point since there are more short put options to hedge against the gains on the lesser short call options. Because the Short Strip Straddle generally writes more options in total than a Short Straddle, the maximum profit potential would also be higher. The Short Strip Straddle is an excellent options trading strategy for use in reallocating the risk in a regular short straddle.

Short Strip Straddle Versus Regular Short Straddle Example Assuming QQQQ trading at $43.00. Regular Short Straddle Sell To Open 1 contract of Jan $43 Call at $1.80 Sell To Open 1 contract of Jan $43 Put at $1.63. Net Credit = $1.80 + $1.63 = $3.43 Short Strip Straddle Sell To Open 1 contract of Jan $43 Call at $1.80 Sell To Open 2 contracts of Jan $43 Put at $1.63. Net Credit = 1.80 + (1.63 x 2) = $5.06

The regular short straddle can also be given a bearish inclination through writing more call options than put options, creating a Short Strip Straddle. Short Strip and Short Strap are the two variants of the Short straddle that options traders can use to introduce a bearish or bullish inclination.

When To Use Short Strip Straddle?

One should use a Short Strip Straddle when one speculates that a stock will remain stagnant and if it breaks out, it will most likely be to upside.

How To Use Short Strip Straddle?

Sell to Open At The Money (ATM) Call Options and Sell to Open twice as much At The Money (ATM) Put options.

Short Strip Straddle Example Assuming QQQQ trading at $43.00. Sell To Open 1 contract of Jan $43 Call at $1.80 Sell To Open 2 contracts of Jan $43 Put at $1.63. Net Credit = 1.80 + (1.63 x 2) = $5.06

Trading Level Required For Short Strip Straddle

A Level 5 options trading account that allows the writing of naked options is needed for the Short Strip Straddle. Read more about Options Account Trading Levels.

Profit Potential of Short Strip Straddle :

Short Strip Straddles have a limited profit potential like all neutral options trading strategies and makes its maximum profit when the stock closes at the options strike price upon expiration where both the Put and Call options expire worthless.

Profit Calculation of Short Strip Straddle:

Maximum Profit = Net Credit

Maximum Loss = Unlimited as long as the stock keep rising or falling.

From the above example : Maximum Profit = $5.06

Risk / Reward of Short Strip Straddle:

Maximum Profit: Limited

Maximum Loss: Unlimited

Breakeven Points of Short Strip Straddle:

A Short Strip Straddle makes a profit if the stock stays between its upper breakeven point and lower breakeven point.

Upper Breakeven Point = Strike price + net credit

Lower Breakeven Point = Strike price - (net credit/[number of put options/number of call options])

From the above example : Upper Breakeven Point: 43 + 5.06 = $48.06 Lower Breakeven Point: 43 - (5.06/[2/1]) = 43 - 2.53 = $40.47 You would notice at this point that a Short Strip Straddle has a closer lower breakeven point than its upper breakeven point. This is the effect of writing more put options than call options.

Advantages Of Short Strip Straddle:

Higher profit than a regular short straddle due to sale of more options.

Reduces risk if the stock breaks out to upside.

Disadvantages Of Short Strip Straddle:

Higher margin needed due to writing more options.

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