Covered Straddle Strategy

The Covered Straddle is a hybrid options strategy that combines a long stock position with a short straddle—selling both a call and a put at the same strike price and expiration. While it generates substantial premium income, it exposes the trader to amplified downside risk. This strategy is typically used by investors with a neutral-to-bullish outlook who are comfortable with margin and assignment risks.

Structure

• Own 100 shares of the underlying stock
• Sell 1 ATM Call (Strike B)
• Sell 1 ATM Put (Strike B)
• Both options share the same strike and expiration

Profit & Loss Profile

• Max Profit: Limited to total premiums received plus any gain from stock appreciation up to the call strike
• Max Loss: Significant; occurs if the stock drops far below the strike—losses from both long stock and short put
• Breakeven: Stock price minus half the total premium received
• Greeks: Delta-positive, Theta-positive (double premium decay), Vega-negative (short options exposed to rising IV)

Example

You own 100 shares of XYZ at $100. You:

• Sell 1 x $100 Call for $3.25
• Sell 1 x $100 Put for $3.15

Net credit = $6.40. Breakeven ≈ $96.80. If XYZ stays near $100, both options expire worthless and you keep the full premium. If XYZ drops to $90, you lose $10 on the stock and $10 on the put, offset by the $6.40 premium → net loss of $13.60.

Ideal Market Conditions

• Outlook: Neutral to slightly bullish
• Volatility: Elevated IV improves premium income; falling IV post-entry is favorable
• Time Horizon: Short-term, aligned with option expiration
• Goal: Generate income while holding stock, with willingness to acquire more shares if assigned

Risk Considerations

• Downside risk is magnified—losses from both long stock and short put
• Short put is not covered—may trigger margin call or require additional capital
• Early assignment risk on both legs, especially near ex-dividend dates
• Requires strict discipline and risk management—losses accelerate below breakeven
• Not suitable for volatile or bearish markets

Summary

The Covered Straddle is a high-premium, high-risk strategy for confident traders with a neutral-to-bullish outlook. It offers income potential but demands careful monitoring and downside protection. Best used when volatility is high and the trader is prepared to manage margin and assignment risks.