Today, on this page, we shall study one of the popular strategies the options trader uses in the low volatile market, known as the multileg short straddle strategy. This strategy includes selling the call and put options with the same strike price and expiry dates. The strategy is implemented to benefit from the neutral market outlook, in which traders expect the underlying asset's price will stay within the range. Traders can earn profit in the form of premiums received by selling the two option contracts, which will also limit the potential loss on the position.
Market outlook of multileg short straddle strategy:
The strategy is the best choice when the market is expected to move in a range-bound scenario. The market is expected to be low volatile to get the best out of this strategy. The best scenario is the absence of significant movement in the underlying asset price. There is a belief in the trader's mind that the asset's price will not experience significant movement.
What is the best time to use the Multi Leg Short Straddle:
When the trader expects the low volatile market.
When the price is going to move in a narrow range.
Setting up a multi leg short straddle:
In order to set up a multi leg short straddle option strategy, traders need to find a perfect option contract from the options chain table. In the next step, choose the best strike price and expiry for both the call and put option contract. And lastly, sell both of them against the premium, which will be your profit.
How to enter the Multileg Short Straddle:
Entering this strategy involves selling two option contracts, call and put, with the same strike price and expiry dates. The amount received as the premium will be the initial profit by entering the strategy. Traders may earn more if the situation is favorable. Traders must ensure that they meet the necessary margin requirements and also consider the risk attached to the strategy.
Break-even points of the multiple straddle strategy:
The upper break-even point is the strike price of the call option contract + the total premium received.
The lower break-even point is the strike price of the put option contract - the total premium received.
Assuming the stock of ABC company is currently trading at ₹100. There is no volatility in the stock price, and thus, a trader decided to sell a call option at ₹100 and a put option at ₹100. By selling so, he earned a profit of ₹10 in the form of a premium.
In the above example, the break-even points will be as below:
The upper break-even point - ₹100 + ₹10 = ₹110
The lower break-even point - ₹100 - ₹10 = ₹90
It indicates that if the price of the stock ABC stays between ₹90 and ₹110, the stock will be profitable, or else traders may face a loss.
How to exit the Multileg Short Straddle:
There are two ways to exit from the strategy, as mentioned below:
Traders can exit the Multileg Short Straddle by buying back the call and put options they sold, effectively closing the position.
Exiting the trade before expiration can be done to lock in profits or limit potential losses based on market conditions and the desired risk-reward profile.
The Multileg Short Straddle strategy is a versatile options trading strategy that can be effective in a low-volatility market. It allows traders to generate income from option premiums while benefiting from time decay. However, it's crucial to understand the risks involved and monitor the market closely, as significant price movements can result in losses. Proper risk management and understanding market conditions are essential to successfully implementing the Multileg Short Straddle strategy.