This strategy involves selling a call as well as put on the same stock / index for the same maturity and strike price.
At-the-Money call and put options are sold in a short straddle to reap the benefits of low volatility. For a short straddle to be profitable both the options must expire at-the-money.
With short Straddle, the investor’s view is neutral. This strategy involves unlimited loss and limited profit.
Current Market Price of Infosys is 940. So I will sell one call option of 940 strike and one put option of 940. I receive 15 and 10 rupees as premium in both the cases.
If stock moves up, the call option will give me loss and if the stock falls, put options results in loss. Premium received in both the options is the maximum profit that can be made.
|Infosys Call and put
Option Strike (K)
As seen in the table above, loss is unlimited on either side of the stock. Maximum profit was received when the stock expired at-the-money.