Lecture No 39
Short Strangle
Rohan Sharma (Coach)

Basics Concepts – Short Strangle
Proficiency -
Advanced
Direction –
Neutral
Volatility - Low
Asset Leg –
Short Put +
Short Call
Max Risk -
UnLimited
Max Reward -
Limited
Income
Strategies

Description – Short Strangle
 Instead of selling ATM options, we sell OTM calls and puts, which
means a lower net credit but typically wider breakeven points.
The Short Strangle is precisely the opposite of a (Long) Strangle.
We short OTM puts and calls with a short time to expiration (one
month or less) in order to pick up income.
As this Strategy exposed to potentially unlimited risk, which is
another reason for making this a short-term strategy.
You would never trade this strategy right before a news event like
an earnings report.
You certainly wouldn’t want any nasty surprises to be lurking
around the corner.

Description – Short Strangle
Sell OTM (lower) strike puts, preferably with one month or
less to expiration.
Sell OTM (higher) strike calls with the same expiration.

Context - Short Strangle
Outlook
With Short Strangles, your outlook is direction neutral—you are
looking for no movement in the stock.
Rationale
To execute a direction-neutral income strategy for a net credit while
expecting a future decline in volatility.
Ideally you are looking for a scenario where the immediate Implied
Volatility has been high, giving you above average options
premiums, but where you anticipate the stock to consolidate
(become less volatile) and remain range bound for the duration of
your trade.

Context - Short Strangle
Net Position
•This is a net credit trade because you have sold calls
and puts.
•Your maximum risk on the trade itself is unlimited,
whereas your maximum reward is limited to the net
credit you receive for selling the calls and puts.

Context - Short Strangle
Effect of Time Decay
 Time decay is helpful to Short Strangles.
Because you are short in options, and because you are exposed to
unlimited downside, you want to be exposed to this position for as
little time as possible.
Time Period to Trade
At least months out.
Breakeven Down = [Lower Strike - Net Credit]
Breakeven Up = [Higher Strike + Net Credit]

Steps to Trading a Short Strangle
Steps In
Try to ensure that the trend is range bound and identify clear areas of support
and resistance.
Try to ensure that no news is coming out soon for the stock.
Steps Out
Manage your position according to the rules defined in your Trading Plan.
Close the losing side by buying back the relevant option if the stock breaks
support or resistance.
Buy back both options if the position is profitable but you think news may
emerge about the underlying stock.

Exiting the Trade - Short Strangle
Exiting the Position
 With this strategy, you can simply unravel the spread by buying
back your calls and puts.
Mitigating a Loss
Buy back your sold options.
Advanced traders may consider buying further OTM calls and puts
on either side in order to create a Long Iron Butterfly, which is more
conservative.

Advantages and Disadvantages
Advantages
Profit from a range bound stock.
Comparatively high-yielding income strategy
Disadvantages
Uncapped risk if the stock moves in either direction.
Capped reward.
Almost certain exercise at expiration.
Bid/Ask Spread can adversely affect the quality of the trade.
High-risk strategy; not for novices or intermediates.

Real Time Example
Rohan Sharma (Coach)

Price Movement
Position on Charts
Rohan Sharma (Coach)

Example – Short Straddle
Market Behavior Nifty
Option /Future Short OTM Call & Put
Action (Long/ Short) Both
Price Movement Expectation Breakout (Low Volatility)
Spot Price 11700
Strike Price (Short OTM Call) 11900
Premium 60
Strike Price ( Short OTM Put) 11500
Premium 55
Break Even (Up) Strike + Net Debit (11900 + 115) = 12015
Breakeven (Down) Strike – Net Debit (11500 – 115) = 11385
Time to Expiry Last/ Mid of the Month
Position of Price in Charts Sideways
Max Risk Unlimited
Max Reward Limited

Short Straddle
Strike Price Short Call 11900 Premium 60 BEP 11960
Strike Price Short Put 11500 Premium 55 BEP 11445
Nifty at Expiry Short Call BEP - 11960 Short Put BEP - 11445 Total P&L
12300 -340 55 -285
12100 -140 55 -85
11900 60 55 115
11800 60 55 115
11700 60 55 115
11600 60 55 115
11500 60 55 115
11400 60 -45 15
11200 60 -245 -185
11000 60 -445 -385