Hi everyone - this is matt from mad strats. If you've been trading for any amount of time, you know stocks, don't always go up. Some traders choose to adapt to this fact by utilizing short positions to profit off a stock's decline in this video. I'm going to teach you how to profit off a less commonly discussed third scenario when a stock moves sideways by the end of this video, you will know how to make money in this situation by using an option strategy known as a straddle.

I will thoroughly discuss the concept behind the strategy and then put my money where my mouth is by showing you a live example of it in my own robinhood account. My hope is that this trading technique resonates with you and maybe even makes you money one day. So we know we want to use a straddle when we think a stock will be trading sideways. But how do we structure it to create a straddle? You would sell both a call option and a put option at the same strike price.

Both of these options would have the same expiration date. It should be noted that, since both options were sold, this overall position is technically called a short straddle. If you were to buy both options, that would be a long straddle which i will cover in another video. Alright, so you know, a straddle is made by selling two options at the same strike price.

I'm sure you still have questions about how this really works. Let's dive into an example to cover the basics say you have been following a stock xyz and it seems to be going nowhere. In fact, it seems to be closely centered around 100, even though it's not moving much, you decide to make some money off of it. By placing a straddle to properly make this position, you would start by selling a call option.

The strike price would be one hundred dollars and let's say the premium is two dollars and eighty cents. Then you would sell a put option at the same strike: price 100 - let's say the premium for this option is two dollars and 20 cents. Remember both of these options must have the same expiration date when properly created. You would be credited 500 to make this straddle.

You would receive 280 from the first position and 220 from the second. You have now been credited 500 from your short straddle on xyz. At the hundred dollar price point, it's time to fast forward to the expiration date and discuss how this could potentially play out, because you know the stock market, like the back of your hand, i'm sure you are mainly interested in the best case scenario. This scenario would be when the options expire and xyz is trading at exactly 100.

This means both options would be worthless and you would get to keep the premium you were initially paid. In other words, the max profit is equivalent to the premium. You were credited to initiate the short straddle. Therefore, in this example, you would make 500.

in my experiences with trading straddles. It is pretty rare for the options to expire at the perfect price. It is much more common for the stocks price to be somewhat close to the strike price of the two options. This means it is vital to know how close close really is in order to be profitable.

Let's figure out what range xyz needs to be in for the short straddle to make you money, the upper bound of the profitable region is computed by taking the strike price of the straddle and adding the net premium of the position. The lower bound is calculated by subtracting the net premium from the straddle strike price, even though this entire region is profitable. The return is higher, as xyz is closer to the hundred dollar price point. On the other hand, the farther xyz deviates from these bounds, the larger the loss would be.

This means the max risk is technically unmitigated. We have now covered all of the key aspects of a straddle position. It is time for me to show you a demonstration in my own robinhood account. After reviewing multiple stocks, i decided verizon was a good contender for straddle position, because the stock appears to be stuck in a range.

This low volatility is exactly the environment. You would want for this particular strategy when it comes to a short straddle the less movement, the better after selecting my expiration date. I sold both a call and a put i used 58 as the strike price, because verizon appears to be tightly trading around that price. Point i was credited a dollar and seven cents for the call and a dollar and eight cents for the put in total.

The net premium was two dollars and fifteen cents. This means i was paid 215 dollars to create the short straddle on verizon. This credit represents the maximum possible profit. I am doubtful.

The stock will be precisely at this value when the options expire. So, let's compute the profitable range, the upper bound is equal to the strike price plus the net credit, which is 60.15. In this case, the lower bound is equal to the strike price minus the net credit, which is 55.85 as long as verizon is trading within this range. When the options expire, this straddle position will be profitable if it is trading outside of this range.

Before the options expire, i can choose to cut the position if the risk to reward no longer matches my training style thanks for watching until the end. I hope you found my explanation of short straddles to be insightful. I would appreciate it if you could hit the like button and leave a comment. It really helps with the youtube algorithm.

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