In a short straddle, what positions are established?

In a short straddle strategy, the positions established involve selling both a call option and a put option at the same strike price and on the same underlying asset. This strategy is typically employed when an investor expects the price of the underlying asset to remain stable and does not anticipate significant volatility.

The rationale behind this approach is that by selling both options, the investor collects premiums, which constitutes the maximum potential profit for the strategy. The aim is for the underlying asset's price to remain near the strike price at expiry, allowing both options to expire worthless, thereby enabling the investor to retain the full amount of the premiums collected.

Furthermore, the primary risk of a short straddle arises from significant price movements in either direction, leading to potential losses that are theoretically unlimited for the call and substantial for the put. This highlights the importance of market analysis before employing such a strategy, as it is best suited for low-volatility environments.

In summary, the correct answer signifies a specific options strategy that utilizes the characteristics of both call and put options at the same strike, thus creating a strategic position based on market expectations.