Key Points
Maya explained, "In high premium situations, you can use the concept of spreads and sell an out-of-the-money (OTM) option for both the call and put to offset some premium..
In such cases, instead of buying a straddle, you can sell both a call and a put option with the same strike price and expiration date, creating a Short Straddle..
"In our Nifty example, selling both a 19650 strike call and put of the near expiry results in a maximum profit of the total premium of 242," Maya elaborated..
Maya further explained, "You can convert your written options to credit spreads by buying an OTM option for both the call and put as a hedge, capping your maximum loss..
"For instance," Maya continued, "if we buy a 19450 put to hedge the sold 19650 put and buy a 19850 call to hedge the sold 19650 call, the total premium of buying the hedge (82 points) is subtracted from the maximum profit.. Here's the payoff graph for a Short Iron Fly."..
