A Beginner’s Guide On Short Strangle; Meaning & Definition

by zoya

Key Highlights On Short Strangle

  • In the world of options trading, the short strangle is a popular strategy used by traders to profit from a neutral market with high volatility. 
  • The strategy involves selling an out-of-the-money call option and an out-of-the-money put option simultaneously. This creates a profit zone between the two options’ strike prices, which allows the trader to earn a premium if the stock price stays within the range of the two options. 
  • With the evolution of technology many trading platforms are allowing trading futures and options (F&O) conveniently. The best mobile trading app shall provide all the indicators and technical tools to trade in the F&O market.

What Is Short Strangle; Meaning & Definition

A short strangle is an options trading strategy that involves selling an out-of-the-money call option and an out-of-the-money put option simultaneously. This strategy is typically used by traders who expect the underlying stock to remain within a specific price range over a specific period.

The short strangle involves selling two options: a call option and a put option. The call option is sold at a higher strike price than the current market price, while the put option is sold at a lower strike price than the current market price. The difference between the two strike prices creates a range within which the stock price must remain for the strategy to be profitable.

The trader who sells a short strangle receives a premium from the buyers of the options. The premium represents the maximum profit that the trader can earn from the strategy. However, the trader also incurs a risk if the stock price moves outside the range created by the two options’ strike prices.

An Example Of Short Strangle

For example, if the stock price rises above the call option’s strike price, the trader will be obligated to sell the stock at that price, resulting in a loss. Similarly, if the stock price falls below the put option’s strike price, the trader will be obligated to buy the stock at that price, resulting in a loss.

Short Strangle: What Are The Benefits and Risks?

Most Common Short Strangle Benefits

  1. The short strangle is a popular strategy among traders because it allows them to profit from a neutral market with high volatility. Traders who use this strategy typically expect the stock price to remain within a specific price range over a specific period, allowing them to earn a premium from selling the call and put options.
  2. The strategy’s profitability depends on the stock price remaining within the range created by the two options’ strike prices. If the stock price stays within this range, the trader can earn the maximum profit represented by the premium received from the buyers of the options.

Most Common Short Strangle Risks

  1. However, the short strangle also involves significant risks. If the stock price moves outside the range created by the two options’ strike prices, the trader can incur substantial losses. 
  2. For example, if the stock price rises above the call option’s strike price, the trader will be obligated to sell the stock at that price, resulting in a loss. Similarly, if the stock price falls below the put option’s strike price, the trader will be obligated to buy the stock at that price, resulting in a loss.

Therefore, traders who use the short strangle strategy must be comfortable with the risk of incurring substantial losses if the stock price moves outside the range created by the two options’ strike prices.

5 Steps: How to Implement the Short Strangle Strategy

The short strangle strategy is implemented by selling an out-of-the-money call option and an out-of-the-money put option simultaneously. To implement this strategy, traders typically follow the following steps:

Step 1: Identify a stock with high volatility that is expected to remain within a specific price range over a specific period.

Step 2: Sell an out-of-the-money call option at a strike price above the current market price of the stock.

Step 3:: Sell an out-of-the-money put option at a strike price below the current market price of the stock.

Step 4: Collect the premium from the buyers of the options.

Step 5: Monitor the stock price to ensure that it remains within the range created by the two options’ strike prices. If the stock price moves outside this range, the trader will need to manage the position accordingly.

Conclusion

The short strangle is a popular options trading strategy used by traders to profit from a neutral market with high volatility. nowadays reputed financial institutions help investors trade all kinds of markets. Share India, for instance, facilitates trading futures and options easily on its platform. 

The options trading charges are also pretty reasonable. This strategy involves simultaneously selling an out-of-the-money call option and an out-of-the-money put option. While it can be a profitable strategy, it also involves significant risks, and traders should be comfortable with the risk of incurring substantial losses if the stock price moves outside the range created by the two options’ strike prices. 

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