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Short Strangle (Sell Strangle) Option Trading Strategy Explained

Published on Thursday, April 19, 2018 | Modified on Monday, April 26, 2021

The Short Strangle (or Sell Strangle) is a neutral strategy wherein a Slightly OTM Call and a Slightly OTM Put Options are sold simultaneously of same underlying asset and expiry date.

This strategy can be used when the trader expects that the underlying stock will experience a very little volatility in the near term.

It is a limited profit and unlimited risk strategy. The maximum profit earn is the net premium received. The maximum loss is achieved when the underlying moves either significantly upwards or downwards at expiration.

A net credit is taken to enter into this strategy. For this reason, the Short Strangles are Credit Spreads.

The usual Short Strangle Strategy looks like as below for NIFTY current index value at 10400 (NIFTY Spot Price):

Suppose Nifty is currently at 10400 and you expect not much movement in near future. In such a scenario, you can execute short strangle strategy by selling Nifty Put and Call at 10200 and at 10600. The net premium received will be your maximum profit while the loss will depend on how high or low the index moves.

When to use Short Strangle (Sell Strangle) strategy?

The Short Strangle is perfect in a neutral market scenario when the underlying is expected to be less volatile.

Example

Example 1 - Stock Options

Let's take a simple example of a stock trading at Rs 40 (spot price) in June. The option contracts for this stock are available at the premium of:

• July 35 Put - Rs 1
• July 45 Call - Rs 1

Lot size: 100 shares in 1 lot

1. Sell 'July 35 Put': 100*1 = 100
2. Sell 'July 45 Call': 100*1 = 100

Net Credit: Rs 100 + Rs 100 = Rs 200

Now let's discuss the possible scenarios:

Scenario 1: Stock price remains unchanged at Rs 40

• July 35 Put - Expires worthless
• July 45 Call - Expires worthless
• Net Credit was Rs 200 initially recieved.
• Total Gain = Rs 200

The total gain of Rs 200 is also the maximum gain in this strategy. This is the amount you received as premium at the time you enter in the trade.

Scenario 2: Stock price goes above Rs 50

• July 35 Put - Expires worthless
• July 45 Call Expires in-the-money with an intrinsic value of (50-45)*100 = Rs 500
• Net Credit was Rs 200 initially recieved.
• Total Loss = Rs 500 - Rs 200 = Rs 300

Scenario 3: Stock price goes down to Rs 30

• July 35 Put Expires in-the-money with an intrinsic value of (35-30)*100 = Rs 500
• July 45 Call - Expires worthless
• Net Credit was Rs 200 initially recieved.
• Total Loss = Rs 500 - Rs 200 = Rs 300

Example 2 - Bank Nifty

Market View - Neutral

When you are expecting little volatility and movement in the price of the underlying.

Actions

• Sell OTM Call
• Sell OTM Put

Sell 1 out-of-the-money put and sell 1 out-of-the-money call which belongs to same underlying asset and has the same expiry date.

Breakeven Point

two break-even points

A strangle has two break-even points.

Lower Break-even = Strike Price of Put - Net Premium

Upper Break-even = Strike Price of Call+ Net Premium"

How to exit?

• Wait for Options to expire and retain the premium received.
• Reverse the trade by buying back the Options sold

Simillar Strategies

Short Straddle, Long Strangle

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