Option Strategies - Top straddle or Straddle sell

Top straddle or Straddle sell

Salient Features

a) Market is expected to move in sideways zone         b) Unlimited loss and limited profits  Introduction: When an investor expects sideways movement in the market then he may enter into a top straddle strategy that means selling a Call and a Put together of the same strike price and same expiry date. Let us take an example to understand this in detail- an investor takes following positions on 27th May 2005 when Nifty Spot was Rs.2070. Action Option type Strike Premium Total investment Short Call 2050 49   Short Put 2050 34 -83 Here he sells Nifty Call and Put option of Strike price Rs.2050 for which he receives a net amount of Rs.83 as premium (Rs.49 received for short Call position and Rs.34 received for short Put position) to create the position. His cash flow at different levels of Nifty closing on 30th June05(last Thursday of the following month) are as follows: Index Long call Long Put Investment Cash flow 1900               -           (150) 83                      (67) 1950               -           (100) 83                      (17) 2000               -             (50) 83                       33 2050               -              -   83                       83 2100              (50)            -   83                       33 2150            (100)            -   83                      (17) 2200            (150)            -   83                      (67) 2250            (200)            -   83                    (117) 2300            (250)            -   83                    (167) Thus it is clear that his profits will occur when the exercise price remains within a certain range of prices (here it is Rs.2000 to Rs.2100). In case of exercise price going beyond the range he will make loss. Here the upper level of range of prices is more than and lower level of range is less than the strike price of call and put taken. This strategy is useful when we expect the market to remain sideways and do not move beyond the current levels.