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Short Strangle Option Strategy

Short Strangle Option Strategy : A short strangle invented for a net credit and profit underlying stock trade in a narrow range between the breakeven points. The profit potential is limited to the total premium received in little commission. They have slight modifications in the short straddle that improves the profitability of the trade. They have greater movement in the underlying stock. The short strangle strategy is profitable and used in an incorrect manner. Here first is an out-of-the-money put and the second is an out-of-the-money call. The underlying stock moves for the call and is put to exercise. They have advantages of stock volatility and used when low volatility is expected for the underlying stock. The credit is received by short strangle and reaches a maximum profit when stock stays within the range of two strike prices. The profit opportunity is limited to the total premiums received. They work best when the stock has little movement until the expiration. The investor receives maximum win if the stock finishes within the strike prices at expiration.

When to Use Short Strangle Option Strategy

This options trading is used when investors think that underlying stock will experience volatility in the near term.

Profit

The maximum loss is unlimited as a stock that continues to move against the trader in either direction. The profit achieved when the price of the underlying is in between the strike price of the short call and the strike price of the shot put.

Loss

The Maximum Loss is unlimited here. The loss occur when the price of underlying greater than the strike price of short call plus net premium received

Breakeven

The breakeven on the upside is calculated by adding a premium of call strike price and downside subtracting premium from the put strike price.

Example

If a trader executes a short strangle at price sell of 1 ABC 105 call at 2.20 and sell 1 ABC 95 put at 2.30. The net credit will be 5.50. At the time when stock is between 95 to 105 then traders keep the full at $5.50 and achieve maximum gain. When stock comes up to $112 trader losses from $7 to105.The strike price is received at $5.50 as they have a net loss of $1.50.

Conclusion

This market is neutral which makes more sense when there is no announcement or earning scheduled. The trader will like to sell strangle that receives two premiums of the stock. The time decay is working for investors as they look for both options to expire worthless as time goes on in this position. The trade has unlimited risk to select while executing a trade and keep quantity sizing small.