13. Strangle

  • Made of a short OTM put And a short OTM call
  • Because both are naked options, the risk is unlimited
  • If both options expire worthless, you keep both the credits in its entirety
  • You want the price not to move
  • Undefined risk position
  • If you want perfect delta neutrality you should pick the options based on delta instead of the price

Separate Charts

Short OTM put
brave_YRz1FFpnyy.png
Short OTM call
brave_yLe7OSqZs8.png

Advantages

  • This position is profitable if the underlying stays inside a range
  • Also profitable if the IV decreases after establishing the strangle
  • Time decays works in favor of this position, because your betting on something not happening
  • Max profit happens only at expiration with both options expiring worthless
  • It could be stablished as a delta neutral strategy initially
    • For example the short put may give you 20 deltas and the short call may give you -20 deltas, so they offset and you have no delta

Analysis

  • Short 1 OTM put at strike price KP for a credit of P
  • Short 1 OTM call at strike price KC for a credit of C
  • Max loss is unlimited
  • Max profit is the credit you received for the options P + C

short_strangle.png

Example

  • Underlying at 100
  • Buying a strangle 10 dls higher and `10 dls lower
  • The put is trading at 3.50 and the call is trading at 3.50
  • This position is referred to as a 90/110 stangle for $7.00
  • Your break evens are 90 - 7 = 83 and 110 + 7 = 117
  • You max profit is $7
  • Your max loss is unlimited because the underlying could go to zero or it could 100x, but is is capped at zero if the undelying price falls
    brave_vWb5sZgIvi.png
Interactive Graph
Table Of Contents
13. Strangle
Separate Charts
Advantages
Analysis
Example