If I sell call and put options (ITM) together to make a kind of straddle. Is it possible that premium of both options increase with the time and expires at a higher premium?
You mean Short straddle …
Yes it is very much possible that it expires at higher premium
Yes! there is high possiblity of expiration on higher premium
I have gone through couple of studies but they say option expires only with intrinsic value (IV) or if option has time value (TV) that will be too little almost negligible.
So my doubt is I wont get the advantage of time value decay.
My 2 cents
Your short straddle can expire at a higher premium.
But your Put and Call BOTH cannot expire at a higher premium. One of them will, max, but not both.
Let’s break it down
The time value of both will fall.
Intrinsic value of ONLY one and exactly one can increase or stay the same.
Intrinsic value of ONLY one and exactly one can decrease or stay the same.
Intrinsic value of both cannot increase.
Hence, BOTH put and call premium cannot be higher on expiry. One one, at most.
Of course, as many here pointed out, both premia can be higher before expiry if vol increases.
Thanks for your valuable insights.
it solved my doubt.
That’s great explanation about the issue, before i was unaware of this issue!
Hi @Sensibull In that case wont his positions be in LOSS as he has executed short straddle and not long straddle ?
Yup. That will be right. If he is short straddle/ strangle, an IV increase will be loss making