At the moment both intraday buying sentiments signal little upside potential as we observed the pair has currently been able to breach and sustain channel resistance at 0.9900 levels where prices were rejected in the recent past at the same juncture. But in the long-term downtrend this upside potential is restrained upto one 0.9955 levels.AUDCAD spot FX is trading at 0.9910. IV of 1W ATM contracts are at 9.86%.Let’s suppose that we execute following option trading positions by shorting 2D at the money put for $500 and short an at the money call of same expiry for $600.While going long in 1000 units of spot FX of AUDCAD, the cost of going long in spot would be $991.Thereby, the total premiums received for selling the options is $1100.Most likely scenario: On expiration, if AUDCAD rallies above the strike price to 0.9955 (our resistance), the 2D put what short would expire worthless.While the shorts on ATM call expires in the money and the 1000 units should be obligated and exercised for 995.50 (0.9955), producing a negligible gain of $5. But including the $1100 in premiums received upon entering the trade would render the certain profits, hence, the total net profit comes to $1105 which is also the maximum profit attainable.Adverse scenario: Alternatively, if the spot price of the pair keeps dropping due to failure swings but holding below the breakeven to 0.9818 would be rest assured, short call expires worthless ($600 can be pocketed in safely) but the naked short put and spot long position suffer large losses.The short put is now worth $1000 and needs to be bought back while the long spot position has lost $9.8 (i.e. 1000*0.9910 spot ref minus 1000*0.9818). In case of exercising obligation on puts would be taken care by these spot outrights.Covered straddles are limited returns, unlimited risk options strategies similar to the writing of covered call.Another way to describe a covered straddle is that it is simply a combination of a covered call write and a naked put write.Since the naked put write has a risk/reward profile of a covered call, a covered straddle can also be thought of as the equivalent of two covered calls.Maximum gain for the covered straddle is reached when the underlying stock price on expiration date is trading at or above the strike price of the options sold.
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