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.
-Sell 1 OTM call
-Sell 1 OTM put
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|
|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|
|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.