When the market is stable, options can be a big winner for certain option trading strategies. One of them is a short straddle. A short position like this is comprised of a brief call and a brief put option. straddles can earn the investor premium income right away. To completely understand the dynamics of a straddle, it is better to understand the basic risks and rewards with selling options short.
An investor who sells short a phone option is looking to help make the premium income on the sale. The options trader is hoping the market declines or stays exactly the same - thus keeping the premium earned without the obligation to the call holder. If the market rises, and the stock itself is not owned by the options investor - the individual could sustain an unlimited loss. When a call option is exercised, owner must deliver the stock at the strike price. If he does not own it, he has to purchase it available in the market - which will in all probability be higher than the price he must sell. A short call is section of a brief straddle.
Selling puts short also generates premium income, but this trader will want the stock to increase - which allows the put to expire. The maximum gain because of this investor may be the premium. If the market declines, the put could get exercised. The obligation of a brief put investor is to get the stock at the strike price. The trader will lose if this happens. Selling puts is the other section of a brief straddle.
Short Straddle Strategy
The basis behind the strategy would be to take advantage of what short calls and short puts can accomplish together. The straddle will earn the investor more in premium then if the options were sold independently as single contracts. Combining these could provide investor more profit - but carry more risk. When someone is knowledgeable about a particular stock and it's normal trading behavior - they can be great candidates for brief straddle investing. If you should be playing an inventory that shows limited movement or at the very least limited trading movement within a particular time - a brief straddle can perhaps work well. All you could are looking for is for both options to expire. The premiums received is the most gain.