20. Inverted Strangle
- A short strangle position wher the
strike price for the short callislowerthan thestrike price for the short put - This position are not the result of someone initialing the position, but rather the result of a
position being adjusted
Analysis
You start with a normal short strangle position
The price starts going down, so the price is now closer to the short put, so the delta for the short put is going to increase, so we need to adjust the call
The typical process for adjusting a position is that the challenged side stays the same and the unchallenged side is adjusted to balance deltas, so we would buy to close the short call, and sell to open a new short call at a lower strike price (short call spread), this would result in a net credit because the short call is closer to ATM
Lets say that the price mover lower, so now your short put is ITM, and we need to make another adjustment in the short call so that deltas don't go out of control, so we make it into a straddle, this is going to result in a credit as well
If the price keeps going down, we need to adjust our short call again, and we endup with the strike price of the short call lower than the short put
Things to consider
- At expiration
at least one leg will be ITMso it will never expire worthless - An inverted strangle behaves exactly like a regular strangle but with the
difference in strike prices as a fixed component(Intrinsic value) - An inverted strangle will have at least one leg ITM which makes it less liquid and at risk for early excercise