Short Strangle
|
Direction |
Break out |
|
Strategy Type |
Volatility |
|
Legs |
Sell 1 OTM Call
Sell 1 OTM Put |
| |
|
|
Max Reward |
Capped |
|
Max Risk |
Unlimited |
|
Time Horizon |
Short |
|
Risk Profile |
Very High |
|
|
|
Payoff Diagram
Description
The short strangle, also known as sell strangle, is a neutral strategy in options trading that involve the simultaneous selling of a slightly out-of-the-money put and a slightly out-of-the-money call of the same underlying stock and expiration date.
Steps Involved
Suppose ABC stock is trading at $40 in June. An options trader executes a short strangle by selling a JUL 35 put for $100 and a JUL 45 call for $100. The net credit taken to enter the trade is $200, which is also his maximum possible profit.
Rational
The short strangle option strategy is a limited profit, unlimited risk options trading strategy that is taken when the options trader thinks that the underlying stock will experience little volatility in the near term. Short strangles are credit spreads as a net credit is taken to enter the trade.