What is the risk profile of an options trader who sells a 'Short Straddle' (writing an ATM Call + writing an ATM Put simultaneously)?

[ A ]Maximum loss is limited to ₹100, while profit is infinite.

[ B ]Loss occurs only if the stock price remains perfectly unchanged at expiry.

[ C ]Zero risk under all market conditions.

[ D ]Maximum profit is limited to the total upfront premium collected; potential loss is theoretically UNLIMITED in both upward and downward market breakouts.[ CORRECT ]

Takeaway

A short straddle writer's maximum profit is capped at the total premium collected, but the potential loss is theoretically unlimited on both the upside and downside if the underlying makes a large move in either direction.

Derivation

Writing an ATM call and an ATM put simultaneously means the seller collects two premiums upfront and profits maximally if the stock stays pinned near the strike at expiry (both options expire worthless). But if the stock breaks out sharply in either direction, the written call (on an upside breakout) or the written put (on a downside breakout) moves deep in-the-money against the writer, with losses growing linearly and without any built-in cap — unlike a spread strategy, there is no protective long option limiting the downside. This asymmetric risk-reward (limited gain, unlimited loss) is the central concept tested, since it's the opposite payoff profile of buying options and is a classic exam distinction between option buyers and option writers.

Why the others fail

A — Maximum loss is limited to ₹100, while profit is infinite.

Maximum loss is capped only at the total premium collected for the buyer side of straddles; for the writer (short straddle), loss is theoretically unlimited, not limited to ₹100.

B — Loss occurs only if the stock price remains perfectly unchanged at expiry.

An unchanged stock price at expiry is precisely the scenario that maximizes the short straddle writer's profit (both options expire worthless, full premium retained), not a loss scenario.

C — Zero risk under all market conditions.

Writing uncovered options inherently carries undefined, potentially unlimited loss exposure if the underlying moves sharply against the position — there is no scenario of zero risk here.