Short Straddle (Sell Straddle or Naked Straddle) Options Trading Strategy Explained

🔍 What is a Short Straddle?

The Short Straddle (or Sell Straddle or naked Straddle) is a neutral options strategy. This strategy involves simultaneously selling a call and a put option of the same underlying asset, same strike price, and same expiration date.

A Short Straddle strategy is used in case of low volatility market scenarios, wherein you expect none or very little movement in the price of the underlying. Such scenarios arise when there is no major news expected until expiration.

This is a limited profit and unlimited loss strategy. The maximum profit is earned when, on the expiration date, the underlying asset is trading at the strike price at which the options are sold. The maximum loss is unlimited and occurs when the underlying asset price moves sharply in an upward or downward direction on the day of expiration.

💡 Profit occurs when the underlying remains near the strike price.

📊 Strategy Setup

Market View: Neutral

Profit Potential: Limited (Max = Premiums Collected)

Risk: Unlimited

Breakeven Points:

• Upper = Strike + Total Premium Collected
• Lower = Strike – Total Premium Collected

💡 Example 1: Nifty Short Straddle (August 2025)

Nifty Spot: 22,000

Strike Price: 22,000 | Expiry: 29-Aug-2025

Total Premium Collected: ₹275

Lot Size: 50 | Max Profit: ₹13,750

Breakeven: 21,725 – 22,275

👉 Profit only if Nifty remains in this range at expiry.

📈 Payoff Chart

💡 Example 2: Bank Nifty Short Straddle (August 2025)

Spot: 48,000 | Strike: 48,000 | Expiry: 29-Aug-2025

Total Premium: ₹460 | Lot Size: 15 | Max Profit: ₹6,900

Breakeven: 47,540 – 48,460

👉 Safe only if Bank Nifty stays around 48,000.

📈 Payoff Chart

💡 Example 3: Reliance Short Straddle (Stock Option)

Spot: ₹2,800 | Strike: ₹2,800 | Expiry: 29-Aug-2025

Total Premium: ₹50 | Lot Size: 250 | Max Profit: ₹12,500

Breakeven: ₹2,750 – ₹2,850

👉 Works only if Reliance remains near ₹2,800.

📈 Payoff Chart

✅ When to Use Short Straddle?

• When the market is expected to remain flat or range-bound
• After earnings or major events
• Options are overpriced (High IV)

🧠 Pros and Cons

👍 Advantages

• Double premium income
• Best in low volatility conditions
• Simple to construct

👎 Disadvantages

• Unlimited risk if the price moves sharply
• High margin requirement
• Needs active monitoring

❓ FAQs

Q1: Can I do this with a small capital?
👉 No, margin requirements are high.

Q2: What if the market moves a lot?
👉 Losses can be huge. Exit or hedge in time.

Q3: Can I adjust the position?
👉 Yes, convert into an Iron Condor or Butterfly.

Q4: Best time to use this?
👉 After a volatility spike or when expecting flat markets.

Q5: Which strike to select?
👉 Always choose At-the-Money (ATM).

🧾 Final Thoughts

The Short Straddle is a powerful income strategy for experienced traders in sideways markets. Use only with proper risk management and avoid during volatile periods.