Question

A short straddle is a long volatility strategy.

True or False

Answer 1

A short straddle is an options strategy comprised of selling both a call option and a put option with the same strike price and expiration date. It is used when the trader believes the underlying asset will not move significantly higher or lower over the lives of the options contracts. The maximum profit is the amount of premium collected by writing the options. The potential loss can be unlimited, so it is typically a strategy for more advanced traders.

Short straddles allow traders to profit from the lack of movement in the underlying asset, rather than having to place directional bets hoping for a big move either higher or lower. Premiums are collected when the trade is opened with the goal to let both the put and call expire worthless. However, chances that the underlying asset closes exactly at the strike price at the expiration is low, and that leaves the short straddle owner at risk for assignment. However, as long as the difference between asset price and strike price is less than the premiums collected, the trader will still make a profit.

Stetment is true