← Strategy LabLesson 12 · 4:24
Covered strangle
Summary
A covered strangle is owning 100 shares and selling a $105 call for $1.58 and a $95 put for $1.41, collecting $299, for when you expect XYZ to stay near its price and are willing to buy more lower down. The most you can make is $799 above $105, and if XYZ went to zero you would lose $19,201 because below $95 you own 200 shares. You break even at $97.01.
Key terms
- covered strangle
- Owning 100 shares while selling a call above the price and a put below it.
- covered call
- Owning shares and selling someone the right to buy them from you at the strike price.
- sold put
- assigned
- When the option you sold is exercised against you, so a sold put makes you buy the shares at its strike.
- premium
- What you pay for an option, which you don't get back, and the most you can lose when you buy one.
- break-even
- The stock price on the last day where you neither make nor lose money: strike plus premium for a call, strike minus premium for a put.
- called away
- Having your shares sold at the strike price because you were assigned on a call you sold.
- uncovered put
- A sold put that the shares you own do not cover, so assignment means buying 100 more shares with extra cash.
Check yourself
Answer each question to see why the right answer is right.
1. How much do you collect for the two options in the lesson's covered strangle?
2. XYZ ends at $90. What is your result on the covered strangle?
3. Why does the line fall twice as fast below $95?
4. XYZ ends at $110. What do you make?
5. Which leg of the covered strangle is not covered by the shares you own?
Finished the video and the quiz? .