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A Short Strangle is a slight modification to the Short Straddle. It tries to improve the profitability of the trade for the Seller of the options. This is done by widening the breakeven points. This requires much greater movement required in the underlying stock/index. In return, the Call and Put option can be worth exercising. This strategy involves the simultaneous selling of two options.
A Short Strangle Strategy can be highly profitable if used correctly. It's all about the timing of the trades of the options. The first is a slightly out-of-the-money (OTM) put. The second is a slightly out-of-the-money (OTM) call. Both options should have the same underlying stock and expiration date. This typically means the net credit received by the seller is less as compared to a Short Straddle. This is due to the fact that both options are sold. However, the break even points are also widened. The underlying stock has to move significantly for the Call and the Put to be worth exercising. If the underlying stock does not show much of a movement, the seller of the Strangle gets to keep the Premium.
When to Use: This options trading strategy is taken when the options investor thinks that the underlying stock will experience little volatility in the near term.
Reward: Limited to the premium received.
1. Upper Breakeven Point=Strike Price of Short Call + Net Premium Received
2. Lower Breakeven Point= Strike Price of Short Put—Net Premium Received