Series 7 practice questionmediumOptions — Short Straddle
What is the maximum loss for a short straddle writer?
- ALimited to the total premium received
- BThe strike price minus the premium
- CTheoretically unlimited on the upside✓ Correct answer
- DLimited to the difference in strike prices
Explanation
Why C — Theoretically unlimited on the upside
A short straddle has theoretically unlimited loss potential on the upside because the short call has unlimited risk as the stock price rises. On the downside, loss is limited to the strike price minus the total premium received (since the stock can only fall to zero). The short call component creates the unlimited risk.
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