If the trader is bearish on market and bullish in volatility, he will implement this strategy. However the trader can be neutral in nature i.e. indifferent if the market moves in either of the direction, this strategy will make profits, but uptrend will give a capped income than downtrend which will give unlimited returns.
This strategy is just the opposite of Long Straddle. A trader should adopt this strategy when he expects less volatility in the near future. Here, a trader will sell one Call Option & one Put Option of the same strike price, same expiry date and of the same underlying asset. If the stock/index hovers around the same levels then both the options will expire worthless an ..
Lower Breakeven = Strike Price of Put - Net Premium, Upper breakeven = Strike Price of Call+ Net Premium
PUT BACKSPREAD Vs SHORT STRADDLE - When & How to use ?
PUT BACKSPREAD
SHORT STRADDLE
Market View
Bearish
Neutral
When to use?
This strategy is work well when an investor expect a flat market in the coming days with very less movement in the prices of underlying asset.
Action
Sell Call Option, Sell Put Option
Breakeven Point
Lower Breakeven = Strike Price of Put - Net Premium, Upper breakeven = Strike Price of Call+ Net Premium
PUT BACKSPREAD Vs SHORT STRADDLE - Risk & Reward
PUT BACKSPREAD
SHORT STRADDLE
Maximum Profit Scenario
Max Profit = Net Premium Received - Commissions Paid
Maximum Loss Scenario
Maximum Loss = Long Call Strike Price - Short Call Strike Price - Net Premium Received
Risk
Limited
Unlimited
Reward
Unlimited
Limited
PUT BACKSPREAD Vs SHORT STRADDLE - Strategy Pros & Cons
PUT BACKSPREAD
SHORT STRADDLE
Similar Strategies
Short Strangle
Disadvantage
• Unlimited risk. • If the price of the underlying asset moves in either direction then huge losses can occur.
Advantages
• A trader can earn profit even when there is no volatility in the market . • Allows you to benefit from double time decay. • Trader can collect premium from puts and calls option .
