An options strategy carried out by holding a short position in both a call and a put that have the same strike price and expiration date. The maximum profit is the amount of premium collected by writing the options.
Investopedia Says:
If a trader writes a straddle with a strike price of $25 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, he or she would be forced to buy it on the market for $50 and sell it for $25.
The short straddle is a very risky strategy an investor uses when he or she believes that a stock's price will not move up or down significantly. Because of its riskiness, the short straddle should be employed only by advanced traders due to the unlimited amount of risk associated with a very large move up or down.
Related Links:
Compare naked strategies to credit spreads and see if the unlimited risk of going naked is worth it. To Limit or Go Naked, That Is the Question
Learn about this aggressive trading strategy that can be used to generate income as part of a diversified portfolio. Naked Call Writing
Learn about a strategy that may be appropriate if you have a positive outlook on a stock. Introduction to Put Writing
An introduction to the world of options, covering everything from primary concepts to how options work and why you might use them. Options Basics Tutorial
