Positron Investments

Trading & Education in Options, Futures, Stocks, Forex
  • Home
  • Technical analysis
    • Technical analysis basics
    • Candlesticks patterns
  • Options
    • Options basics
    • Options strategies
    • Binary options OTC
  • Futures
    • Futures basics
  • Forex
    • Forex basics
  • Market View
  • Contact
  • el

Options strategies

  • Bullish strategies

    • Long call
    • Covered call
    • Short put
    • Protective put
    • Call bull spread
    • Put bull spread
    • Collar
    • Synthetic long stock
  • Bearish strategies

    • Long put
    • Covered put
    • Short call
    • Protective call
    • Put bear spread
    • Call bear spread
    • Synthetic short stock
  • Neutral strategies

    • Long straddle
    • Short straddle
    • Long strangle
    • Short strangle
    • Long call butterfly
    • Short call butterfly
    • Long put butterfly
    • Short put butterfly
    • Iron condor
    • Reverse iron condor
    • Call ratio spread
    • Put ratio spread

Short strangle

Construction

The short strangle strategy is the opposite of the long strangle. It consists of the simultaneous writing of the same number of OTM calls and puts, with different strike prices but the same expiration, on the same underline security. It is similar to the short straddle strategy but with different strikes.

 

 

 

When to use

When we believe that the price of the underline security will remain relatively stable or within a price range and the implied volatility is also high. The higher the implied volatility the more money we earn from the short selling of the premiums and if the stock at expiration is anywhere inside the range which is defined from the two different strikes, then all options will expire worthless and we will accomplish the maximum profit.

On the other hand, a strong price move in either direction above the higher or below the lower strike, which exceeds the aggregate premium we have received, can cause us great loss. For example, if the premium received is $3/share and the stock moves $5 beyond any strike, then we will have a loss of $2/share, which is $200 if we have written one call and one put ($2×100). The strategy has almost unlimited losses in both directions and that’ s why it is considered risky.

Loss/Profit at expiration

Maximum loss: Unlimited to the upside and until the stock goes to zero to the downside (put strike – 0) – premium received + commissions.

Maximum profit: Premium received – commissions.

Profit/Loss diagram

Below we can see the profit/loss diagram for the short strangle strategy. We have written one call with premium $2 and strike $25 and one put with premium $1 and strike $20.

Short strangle strategy example

In the daily chart of stock DE (below), we have spotted a strong resistance (line 2) and a strong support (line 1). Also, after a sharp downward move implied volatility is above the average. We believe that within a month period price will not exceed the support line at $70 or the resistance line at $84.

In that case we can write one call with strike $82.50 and premium $1 and one put with strike $70, premium $0.80 and expiration for both of them after one month. The aggregate premium we receive is $180 [($1+$0.80)x100]. If the stock at expiration is within the range defined by the strikes, then the options expire worthless and we accomplish the maximum profit which is $180 minus commissions.

If the stock at expiration is $1.80 above the higher strike or below the lower strike then we are break-even (without estimating commissions), but above $1.80 we are having losses.

Links

  • Bloomberg.com
  • Capital.gr
  • chartmill.com
  • Finviz.com
  • Forexfactory.com
  • Freestockcharts.com
  • Yahoo Finance

Recent posts

  • Possible breakdown in Greek stock exchange
  • Application of a simple strategy in EUR/USD
  • S&P 500 runs out of fuel
  • Short term downtrend in Greek stock exchange
  • Possible upward movement in S&P 500

Blog categories

  • Day/swing trades
  • Economy/Politics
  • Trading signals
  • Trading strategies

About Positron

Curriculum vitae
Sitemap

Share

Copyright © 2018 Positron-investments.com - All rights reserved.

  • En En
  • Gr Gr