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Short Strangle Strategy

Strategy Type:

Short Strangle is a neutral strategy. It's employed when an investor anticipates limited price movement in the underlying asset.

Components: The strategy involves two main components:

  • Short Put Option: Simultaneously, the investor sells (writes) an out-of-the-money put option with a different strike price. The put strike is typically below the call strike.
  • Short Call Option: The investor sells (writes) an out-of-the-money call option with a specific strike price.

Profit and Loss Potential:

  • Maximum Profit:The maximum profit is limited and occurs if the underlying asset's price remains between the strike prices of the short call and short put options. The profit is capped at the net premium received from selling both options.
  • Maximum Loss:The maximum loss is unlimited and occurs if the underlying asset's price moves significantly beyond the strike prices of the options in either direction.
Break-Even Point: The break-even points are based on the strike prices of the options used. These points can be calculated to determine the range within which the strategy is profitable.

Strategy Goals:

  • The primary goal of a Short Strangle is to profit from limited price movement in the underlying asset. It's designed to capitalize on time decay and declining option premiums.
  • The strategy is suitable when an investor expects the underlying asset to trade within a specific price range with relatively low volatility.

Risk Management:

  • The risk is unlimited on the upside and downside. The unlimited risk is a key consideration when implementing this strategy.
  • The strategy provides a net credit (premium received) upfront, which can help offset potential losses.