Short Strangle

Short Strangle

Components

Short one OTM Call
Short one OTM Put

Short one put option with a lower strike price and short one call option at a higher strike price.

Risk / Reward

Maximum Loss: Unlimited as the market moves in either direction.

Maximum Gain: Limited to the net premium received for selling the options.

Characteristics

When to use: When you are bearish on volatility and think market prices will remain stable.

A short strangle is similar to the Short Straddle except the strike prices are further apart, which lowers the premium received but also increases the chance of a profitable trade.

Comments (6)

PeterApril 4th, 2012 at 5:36pm

Hi Helena,

Sure, take a look at this screen shot;


[click to enlarge]

This was taken just now on MSFT. An example of a strangle here would be;

Sell 33 call @ 0.09
Sell 29 put @ 0.07

Net premium received would be $16 per contract. The breakeven points would be 33.16 on the upside and 28.84 on the downside.

HelenaApril 4th, 2012 at 3:17pm

Hi Peter,

Is it possible to give an example with numbers using this strategy? I just want to confirm some concepts you have explained here. thanks so much.

PeterNovember 17th, 2011 at 4:17pm

It depends how far out of the money the options are and how close to expiration. If the strikes are 10% either side of the stock price you will likely not have any problems finding a buyer.

RoshanNovember 17th, 2011 at 8:41am

Peter Thanks once you have been very helpful.
just one more question.
I would be using OTM options for short strangle. So what is the probability or even a possibility that I will find a buyer when I get into short strangle.

PeterNovember 17th, 2011 at 4:20am

Hi Roshan,

Yes, for any short positions your broker will require capital for the trade, which is called a margin. The margin is to protect the broker/clearer (and hence the trading counterparty) from large losses as a result of unfavourable moves in the underlying.

RoshanNovember 17th, 2011 at 12:24am

Hi Peter,
I would like to know if i should be having any capital in my account while getting into a short strangle position in any individual stock.
will the premium be credited to my account immediately on entering into the short strangle position.

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