Neutral Outlook & High Volatility



Directional Assumption:  Neutral


Setup:
– 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/ThetaIt 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


Categories: Strategies