Short Strangle Option

Short Strangle Option

Short Strangle is an option strategy with limited profit potential and conditionally unlimited risk, based on selling volatility. The use of such a strategy makes sense when the trader has a prediction that the price will not change much before the expiration. In this case, the seller of the options receives his premium, but does not fulfill any obligations and does not incur any losses associated with them.

The advantage is that the seller of options in short strangle strategy receives at once a double option premium for two differently directed options. As well as the possibility to profit in the absence of any noticeable price movements and volatility.

Strategy explanation

The short strangle strategy is selling call and put options with the same expiration date but different strike prices. It works like this: you sell put options with a certain strike price and then sell a similar number of call options with a different strike price. The strike of the call option must be greater than the strike of the put option. All options have the same expiration date.

Let’s take a short strangle example. Suppose the call option has a premium of $25 and a strike price of $100. The put option has a premium of $15 and a strike price of $90. The total premium is $40 ($25 + $15). Thus, the first breakeven point is at $140 ($100 + $40), and the second one is $50 ($90 - $40), respectively. If the asset stays in the $50 to $140 price range, we will make a profit of $4000 ($40 * $100). And we will lose money if the price moves out of this price range.

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2022-04-22 • Updated

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