Short Strangle
Description
The Short Strangle is a simple adjustment to the Short Straddle to improve the prob-
ability of a profitable trade by widening the strikes and therefore the breakeven
points. Instead of selling ATM options, we sell OTM calls and puts, which means a
lower net credit but typically wider breakeven points.
The Short Strangle is precisely the opposite of a (Long) Strangle. We short OTM
puts and calls with a short time to expiration (one month or less) in order to pick up
income. Because we are short options, time decay works for us, so we only select
short-term expiration dates. Also we are exposed to potentially unlimited risk, which
is another reason for making this a short-term strategy. Its worth reemphasizing that the problem is that
you could be successful at it for months, picking up modest income over and over
again, and then wham, one big loss will wipe out years worth of gains.
Each leg of the trade has uncapped downside. If the stock starts going ballistic in
either direction, then your position is precarious to say the least. If the stock remains
rangebound, then we will make a limited profit. But it’s not enough for me to get
excited. If the stock gaps in either direction, we’re history!
You would never trade this strategy right before a news event like an earnings report.
You certainly wouldnt want any nasty surprises to be lurking around the corner.
P/L Profile
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