Strategies in Trading Options Contracts (Part 7)

Following the previous Q&A, in this issue, Cong Thuong Newspaper will continue to introduce to readers another strategy to help investors optimize profits in cases where the market price of the underlying asset will fluctuate little. That is strategy number 7 - Short Straddle strategy.

Short Straddle Strategy

The Short Straddle strategy is implemented by simultaneously selling a call option and a put option on an underlying asset with the same strike price and expiration date. This strategy has a limited profit and unlimited loss depending on the volatility of the underlying asset's market price. Therefore, this is a high-risk strategy.

Strategies in Trading Options Contracts (Part 7). Photo MXV

At the expiration date, if the price of the underlying asset does not differ too much from the strike price of the option, the investor will have a good profit. On the contrary, if the difference is significant, the investor is likely to suffer a large loss. The Short Straddle strategy is often used when the investor believes that the market price of the underlying asset will fluctuate little compared to the strike price of the option.

For example, an investor implements a Short Straddle strategy by simultaneously selling a December 2024 Wheat contract call option with a strike price of 720 cents/bushel for a premium of 64 cents/bushel and selling a put option with a strike price of 720 cents/bushel for a premium of 60 cents/bushel.

The profit from the Short Straddle strategy depends on the price of the December 2024 Wheat contract (ZWAZ24) in the future. The following scenarios are possible:

Case 1: ZWAZ24 contract price is higher than 720 cents/bushel

If the ZWAZ24 contract price is above 720 cents/bushel, say 790 cents/bushel, the call option will be exercised. The investor must now buy 1 ZWAZ24 contract at 790 cents/bushel to fulfill his obligation to sell the contract at 720 cents/bushel. Thus, the investor receives a profit of (64 + 60) - (790 – 720) = 54 cents/bushel.

Case 2: The ZWAZ24 contract price is exactly 720 cents/bushel

The investor does not exercise either option. The investor receives a profit equal to the total premium of the two options, i.e. (64 + 60) = 124 cents/bushel.

Case 3: ZWAZ24 contract price falls below 720 cents/bushel

If the ZWAZ24 contract price is below 720 cents/bushel, say 550 cents/bushel, the put option will be exercised. The investor will now be obligated to buy 1 ZWAZ24 contract at 720 cents/bushel and sell the contract at 550 cents/bushel. The investor will incur a loss of (720 – 550) - (64 + 60) = 46 cents/bushel.

Thus, the Short Straddle strategy is a risky strategy as it limits the investor's profit to a certain level but exposes the investor to unlimited losses.

Source: https://congthuong.vn/hoi-dap-giao-dich-hang-hoa-so-72-cac-chien-luoc-trong-giao-dich-hop-dong-quyen-chon-phan-7-345156.html