Short Strangle Strategy

The short strangle is a neutral options trading strategy. It is comprised of a short call and a short put, both OTM options . By using this stratergy, traders take positions on both sides of market.

Trade

-Sell 1 OTM call
-Sell 1 OTM put

Trade Example

Stock XYZ is trading at $28.5 a share.
– Sell 30 call for $0.35
– Sell 27 put for $0.59
– The net credit received for this trade is $0.94

Profit & Loss Diagram

Short Strangle Summary

Break Even PriceHigher side : Strike price of short call + Premium
Lower Side : Strike price of short put – Premium
Maximum ProfitLimited to the amount of initial premium received
Maximum Profit ScenarioStock is between the short call and short put strike prices at expiration
Maximum LossUnknown
Loss ScenarioStock is higher than the Short Call Strike + Premium
Stock is lower than the Short Put – Premium
Why TradeIf you do not have any directional bias in the market , you can use this strategy.
When to OpenStock Outlook : Neutral
Volatility : High so you can get higher net credit
Which strikes to choose?For best results, pick strike prices close to 16 delta call and 16 delta put.
When to CloseWhen the trade is making 50% of the max profit potential
Legs2 legs
Passage of timePositive impact on trade.
With the passage of time, the value of this option decreases.
Increase in volatilityNegative impact on trade.
With an increase in volatility, the value of this option increases.
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