Why is a short straddle risky?

Understanding Short Straddles 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 are low, and that leaves the short straddle owner at risk for assignment.

investopedia.com - Short Straddle Definition - Investopedia

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What Is a Short Straddle?

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. Key Takeaways Short straddles are when traders sell a call option and a put option at the same strike and expiration on the same underlying. A short straddle profits from an underlying lack of volatility in the asset's price.

They are generally used by advanced traders to bide time.

Understanding Short Straddles

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 are 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. Advanced traders might run this strategy to take advantage of a possible decrease in implied volatility. If implied volatility is unusually high without an obvious reason for it being that way, the call and put may be overvalued. In this case, the goal would be to wait for volatility to drop and then close the position for a profit without waiting for expiration.

Example of a Short Straddle

Most of the time, traders use at the money options for straddles.

If a trader writes a straddle with a strike price of $25 for an underlying stock trading near $25 per share, and the price of the stock jumps up to $50, the trader would be obligated to sell the stock for $25. If the investor did not hold the underlying stock, they would be forced to buy it on the market for $50 and sell it for $25 for a loss of $25 minus the premiums received when opening the trade. There are two potential breakeven points at expiration at the strike price plus or minus the total premium collected. For a stock option with a strike price of $60 and a total premium of $7.50, the underlying stock must close between $52.50 and $67.50, not including commissions, for the strategy to break even.

A close below $52.50 or above $67.50 will result in a loss.

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Where is donk from?

If you're not familiar with donk, it's a high-octane subgenre of house music, also known as hard bounce or bouncy techno, that originated in the north of England and was popularised by The Blackout Crew's track, 'Put A Donk On It'.

djmag.com - Point Blank Techtorial: How to Make a Donk | DJMag.com

For this music production tutorial, Point Blank were joined by an extra special guest, DJ Slavine, to demonstrate how to make one of the most iconic sounds in electronic music today – the donk. If you’re not familiar with donk, it’s a high-octane subgenre of house music, also known as hard bounce or bouncy techno, that originated in the north of England and was popularised by The Blackout Crew’s track, ‘Put A Donk On It‘. Follow on below to find out how you can start making your own blistering donks. During the video, DJ Slavine takes us through how to make the perfect donk using Ableton Live’s inbuilt plugins. A fun fact about this donk is that it’s actually the same one that Point Blank’s Ski Oakenfull created in his Calvin Harris feat. Dua Lipa ‘One Kiss’ deconstruction video. Be sure to stick around until the end of the video where Slavine demonstrates how you can use this highly-sought-after sound across a range of musical styles. Want to learn how to take your music productions to the next level? Then be sure to check out Point Blank’s music production courses in London, Los Angeles and online. Plus, they’re currently offering 25% off their selected online and Los Angeles courses until 18th April using the codes ONLINE25 and LA25