Neutral Outlook & High Volatility
Directional Assumption: Neutral
– Sell OTM Call
– Sell OTM Put
Timeline:- around 45 days
Ideal Implied Volatility Environment: 50% or greater. Implied volatility (IV) plays a huge role in our strike selection with strangles. The higher the IV, the wider our strangle can be while still collecting similar credit to a strangle with closer strikes that are sold in a lower IV environment. If we choose to keep our strikes closer to the stock price, a higher IV environment will yield a much larger credit, as IV is essentially a reflection of the option prices.
Profit Target: If my position shows a profit near 50% of the max potential gain, I will close the position early to lock in profits.
Time Decay/Theta: It will erode the value of the option I sold (good) but it will also erode the value of the option I bought (bad).
Risk Management: This trade can be scaled up to 1-2% of my account.
Max Loss / Break Even: – Downside: Subtract total credit from short put – Upside: Add total credit to short call