Short Strangle
Definition : Selling one call and one put in the same option class, in the
same expiration cycle, but with different strike prices. Typically, an OTM
call and an OTM put are sold. A strangle in which an ITM call and an ITM
put are sold is called a short guts strangle.
A short strangle is a volatility-selling strategy, like the short straddle. But
with the short strangle, the strikes are farther apart, leaving more room for
error. With these types of strategies, movement is the enemy. Wiggle room
is the important difference between the short-strangle and short-straddle
strategies. Of course, the trade-off for a higher chance of success is lower
option premium.
Exhibit 15.10 shows the at-expiration diagram of a short strangle sold at
1.00, using the same options as in the diagram for the long strangle.
EXHIBIT 15.10 Short strangle at-expiration diagram.
Note that if the underlying is between the two strike prices, the maximum
gain of 1.00 is harvested. With the stock below $65 at expiration, the short
put is ITM, with a +1.00 delta. If the stock price is below the lower
breakeven of $64 (the put strike minus the premium), the trade is a loser.
The lower the stock, the bigger the loss. If the underlying is above $75, the