Options strategy guide
Short strangle strategy
A short strangle sells an out-of-the-money put and call with the same expiration. The position receives a net credit and can keep that credit if the stock stays between the short strikes through expiration. Moving the strikes farther apart usually reduces the credit and widens the profitable range, while leaving substantial tail risk.
Payoff and maximum risk
The lower breakeven is the put strike minus the total credit; the upper breakeven is the call strike plus the credit. Maximum profit is limited to the credit. Below the put breakeven, losses grow as the stock falls and can approach the put strike's full value less the credit if the stock reaches zero. Above the call breakeven, losses grow as the stock rises and are theoretically unlimited because the short call has no upper loss bound.
This is an undefined-risk position. Margin requirements can change quickly, and assignment may create shares or a short stock position. A wider strike interval does not make the loss bounded.
Earnings and volatility
The premium reflects market pricing, not a promise that the stock will remain between the strikes. Earnings can produce a gap through either side. A volatility decline after the event may help, but a sufficiently large stock move can outweigh it. Historical moves and the implied move describe different evidence; neither is a cap on future movement.
Example
If a stock is at $100, a 95 put is sold for $2.00 and a 105 call is sold for $1.80, the total credit is $3.80. Expiration breakevens are $91.20 and $108.80. The maximum possible gain is $380 per standard contract. Below the lower breakeven, losses increase toward the downside; above the upper breakeven, call losses have no theoretical cap.
Practical checks
- Stress-test both tails, including a gap beyond the short call.
- Size using a realistic loss scenario and broker margin rules.
- Consider early assignment, liquidity, commissions and slippage.
- Never use the received credit as the position's maximum risk.
This guide is educational and does not recommend opening a short strangle. Options involve substantial risk; review the research methodology and full disclaimer.