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Directional Assumption: 

Neutral

A short strangle gives me the obligation to buy the stock at the put strike price and the obligation to sell the stock at the call strike price if the options are assigned. I am wanting the stock price to remain somewhere between the put and call strike so the the options I sell will expire worthless.

When to Run It

I am anticipating minimal movement of the underlying stock.

Setup

  • – Sell ATM Call
  • – Sell ATM Put

NOTE: Both options have the same expiration month.

Timeline

30-45 days

Ideal Implied Volatility

** 50% or greater**

The higher the IV, the more credit I will receive from selling the options. A higher credit ultimately means I will have wider breakeven points, since I can use the credit to offset losses I may see to the upside or downside.

At the end of the day, a larger relative credit results in a higher probability of success with this strategy.

Profit Target

Winner : If my position shows a profit near 25% of the max potential gain, I will close the position early to lock in profits.

Loser: I will close the position at 2 x’s the credit recieved if it moves against me.

Time Decay

As time goes by theta works doubly in my favor as I collect premium on both the options that I sold as long as the price stays within the strikes.

Maximum Profit

Potential profit is limited to the net credit received.

Maximum Loss

This is an undefined risk trade since the call and put I am selling are naked. It also takes up more buying power because of the risk.

If the stock goes up, my losses could be theoretically unlimited.

If the stock goes down, my losses may be substantial but limited to the put strike minus the net credit received.

Risk Management

This trade can be scaled up to 3-5% of my account.

Tip

With short straddles, I don’t have much wiggle room because the short options are already on the same strikes. One option is to roll the whole straddle out in time, using the same strikes. This can be done for a credit, and I will hope for the stock price to return to my short strike by the new expiration.

Categories: Strategies