4/8/23, 6:56 PM Short Strangle Option Strategy - The Options Playbook

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The Options Strategies » Short Strangle

Short Strangle

The Setup
Sell a put, strike price A
Sell a call, strike price B
Generally, the stock price will be
between strikes A and B

NOTE: Both options have the same expiration

month.

Who Should Run It

The Strategy All-Stars only

NOTE: This strategy is only for the most

A short strangle gives you the obligation to buy the stock at strike
advanced traders who like to live dangerously
price A and the obligation to sell the stock at strike price B if the
(and watch their accounts constantly).
options are assigned. You are predicting the stock price will
remain somewhere between strike A and strike B, and the options
you sell will expire worthless. When to Run It
By selling two options, you significantly increase the income you You are anticipating minimal movement on
would have achieved from selling a put or a call alone. But that the stock.
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4/8/23, 6:56 PM Short Strangle Option Strategy - The Options Playbook

comes at a cost. You have unlimited risk on the upside and

substantial downside risk. To avoid being exposed to such risk,
you may wish to consider using an iron condor instead.
Break-even at Expiration
Like the short straddle, advanced traders might run this strategy There are two break-even points:
to take advantage of a possible decrease in implied volatility. If
implied volatility is abnormally high for no apparent reason, the Strike A minus the net credit received.
call and put may be overvalued. After the sale, the idea is to wait Strike B plus the net credit received.
for volatility to drop and close the position at a profit.
The Sweet Spot
Options Guy's Tip
You want the stock at or between strikes A
and B at expiration, so the options expire
worthless.
You may wish to consider ensuring that strike A and strike
B are one standard deviation or more away from the stock price Maximum Potential Profit
at initiation. That will increase your probability of success.
However, the further out-of-the-money the strike prices are, the
Potential profit is limited to the net credit
lower the net credit received will be from this strategy.
received.

Maximum Potential Loss

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

If the stock goes down, your losses may be

substantial but limited to strike A minus the
net credit received.

Ally Invest Margin

Requirement
Margin requirement is the short call or short
put requirement (whichever is greater), plus
the premium received from the other side.

NOTE: The net credit received from

establishing the short strangle may be applied
to the initial margin requirement.

After this position is established, an ongoing

maintenance margin requirement may apply.
That means depending on how the underlying
performs, an increase (or decrease) in the
required margin is possible. Keep in mind this
requirement is subject to change and is on a
per-unit basis. So don’t forget to multiply by
the total number of units when you’re doing
the math.

As Time Goes By
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4/8/23, 6:56 PM Short Strangle Option Strategy - The Options Playbook

For this strategy, time decay is your best

friend. It works doubly in your favor, eroding
the price of both options you sold. That means
if you choose to close your position prior to
expiration, it will be less expensive to buy it
back.

Implied Volatility
After the strategy is established, you really
want implied volatility to decrease. An
increase in implied volatility is dangerous
because it works doubly against you by
increasing the price of both options you sold.
That means if you wish to close your position
prior to expiration, it will be more expensive
to buy back those options.

An increase in implied volatility also suggests

an increased possibility of a price swing,
whereas you want the stock price to remain
stable between strike A and strike B.

Check your strategy with Ally Invest tools

Use the Profit + Loss Calculator to establish break-even points, evaluate how your strategy might
change as expiration approaches, and analyze the Option Greeks.
Use the Probability Calculator to verify that both the call and put you sell are about one standard
deviation out-of-the-money.
Examine the stock’s Volatility Charts. If you’re doing this as a volatility strategy, you want to see
implied volatility abnormally high compared with historic volatility.

Don’t have an Ally Invest account? Open one today!

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