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 Price | Higher side : Strike price of short call + Premium Lower Side : Strike price of short put – Premium |
| Maximum Profit | Limited to the amount of initial premium received |
|---|---|
| Maximum Profit Scenario | Stock is between the short call and short put strike prices at expiration |
| Maximum Loss | Unknown |
| Loss Scenario | Stock is higher than the Short Call Strike + Premium Stock is lower than the Short Put – Premium |
| Why Trade | If you do not have any directional bias in the market , you can use this strategy. |
| When to Open | Stock 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 Close | When the trade is making 50% of the max profit potential |
| Legs | 2 legs |
| Passage of time | Positive impact on trade. With the passage of time, the value of this option decreases. |
| Increase in volatility | Negative impact on trade. With an increase in volatility, the value of this option increases. |
