19 lines
1.2 KiB
Plaintext
19 lines
1.2 KiB
Plaintext
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 |