Short straddles - Risk management

Discussion in 'Options' started by jebaanandhan, Oct 15, 2010.

  1. Hi All,
    I am newbie to options. I have some questions regarding risk management in short straddles.

    Lets take an example.
    I am selling 1 ATM put and 1ATM call for Gold daily options

    when the current price is 1381.3
    Daily Gold (Dec Future)1380 CALL :5.13 opening price
    Daily Gold (Dec Future)1380 PUT:5.62 opening price

    The upper breakeven will be
    and lower breakeven will be

    If the underlying price moves below 1374.38 or moves above 1385.13 will create potential unlimited loss.

    The questions are
    *) If the price stays between 1374.38 and 1385.13, will the net amount be profit?
    *) How the each point movement in call or put after upper breakeven point or lower breakeven against underlying movement?.

    *) How good is the idea to put underlying buy (buy stop order at 1385.13) and underlying sell(sell stop order at 1374.38) with tighter stop loss?

    *)If the one of the breakeven point is breached, one option will be worthless and other option intrinsic value will increase. For example, upper breakeven point is breached, put option will be worthless and buy stop order will be triggered. So will call option and underyling buy order move in same ratio?

    *) Is there any chance in the directional rally,(i mean either upper breakeven point breach or lower break even point breach and assume one of the stop order of underlying is executed) underlying trade will overtake the loss in one of the options?.