What it is
You sell a put and a call at one strike, normally the stock's current price, expiring on the same day, and hold no shares. Options at the money carry the most time value of any strike, so this pair collects more premium than any other two-option sale on the same stock and date.
Both options start at the money, so one of them is almost certain to finish in the money. The trade is not about avoiding that; it is about the stock ending close enough to the strike that what that option is worth at expiry is less than the two premiums collected.
What has to happen for it to make money
The stock has to end within the two premiums of the strike. Right at the strike, both expire worthless and the whole credit is kept; each dollar away from it in either direction gives back a dollar a share. Past the strike plus the credit, or under the strike minus it, the trade is losing.
It is a pure bet against movement. Selling at the money means the market has priced a typical move into those premiums, so the seller is wagering the stock will move less than that. A fall in volatility helps before expiry, and helps this trade more than almost any other.
Once it is on
Time decay is at its strongest for at-the-money options, and this position holds two of them, so a quiet day is worth a great deal. The cost is that it is never safely out of range: the profit peak is a single price, not a band, and any drift starts eroding it. Sellers usually close early at a fraction of the credit, or adjust by rolling the threatened side, rather than wait for expiry.
Brokers treat it as one of the riskiest approvals to grant, because the call side is uncovered, and the margin they hold moves with the stock.
What goes wrong
Any real move. A gap on earnings or a market shock can take the stock past a break-even overnight. On the downside the loss runs to a price of zero; on the upside it has no ceiling.
Volatility jumping while you hold it. Even a stock that has not moved costs more to buy back once the market grows nervous, and the margin requirement rises with it, which can force a close at the worst price.
Pros and cons
- Pro: the largest premium of any two-option sale.
- Pro: the fastest time decay there is.
- Pro: no view on direction needed.
- Con: the full credit is kept only at one price.
- Con: unlimited loss upward, and down to zero below.
- Con: needs a high options approval and margin that moves.
In Restrike
The Log shows the put and the call as two positions, because two sold options are not paired into one; a shared strategy label scores them together. The margin cushion charges both sides in full, more than most brokers hold for a straddle, which errs toward caution. Import is read-only, and Restrike never places a trade.