Tim Olson
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1.6 KiB
1.6 KiB
description, tags
| description | tags | ||||
|---|---|---|---|---|---|
| A sideways income strategy selling an OTM call at K1 and an OTM put at K2 < K1, collecting premium with a wider profit zone than a short straddle but lower credit. |
|
Short Strangle
Section: 2.26 | Asset Class: Options | Type: Income
Overview
The short strangle is a sideways strategy consisting of a short position in an OTM call option with strike K1 and a short position in an OTM put option with strike K2 (K2 < K1). This is a net credit trade. Since both options are OTM, this strategy is less risky than a short straddle position; the flipside is that the initial credit is also lower. The trader's outlook is neutral. This is an income strategy.
Construction
- Sell 1 OTM call option at strike K1
- Sell 1 OTM put option at strike K2 (K2 < K1), same expiry
Net credit: C
Payoff Profile
f_T = -(S_T - K1)+ - (K2 - S_T)+ + C
- Upper breakeven: S*_up = K1 + C
- Lower breakeven: S*_down = K2 - C
- Max profit: P_max = C (if K2 <= S_T <= K1 at expiry; both options expire worthless)
- Max loss: L_max = unlimited (stock can move far in either direction)
Key Conditions / Signals
- Neutral view; expects stock to remain between K2 and K1 through expiry
- High implied volatility environment makes the collected credit larger
- Wider profit zone than a short straddle, but smaller credit collected
Notes
Unlimited risk in both directions once the stock moves outside [K2, K1]. The position is short vega and long theta. Less risky than the short straddle but still requires active management for large moves.