Short Straddle is the simultaneous sale of a call and a put on the same underlying security with the same strike price and expiration. A short straddle would be established by an investor who believes that the security price will move sideways.
Applying "Short Straddle" to Securities Exams:
When a customer believes that a security is going to remain stable in price she may to choose to establish a short straddle to capitalize on her belief. A short call is profitable if the market value of the underlying security goes down, and a short put is profitable if the market value goes up. If the customer sells a call and a put and the price of the underlying security doesn’t move, up or down, the options will expire worthless and the investor will profit by the amount of the premiums she received. . Ex: Sell 1 ABC Dec 90 call @6 Sell 1 ABC Dec 90 put @ 6
If the market value of ABC is 90 when the options expire in December the options will expire and the investor will realize a profit of $1200.