← Strategy LabLesson 24 · 4:24
Short strangle
Summary
A short strangle fits a view that XYZ stays between $95 and $105: you sell the $105 call for $158 and the $95 put for $141, collecting $299, the most you can make, anywhere in that range. The loss above has no limit, below it keeps growing until XYZ reaches zero, and you break even at $92.01 or $107.99. In the drawn crash you would be down $1,334 today, more than 4 times the $299, so a wider range is not a safer trade.
Key terms
- short strangle
- Selling a call and a put at different strikes further out, collecting less than a straddle with the same open sides.
- uncovered selling
- Selling options without owning the shares or setting the cash aside to back them, so your broker holds margin.
- margin
- Money your broker holds against what a sold position could lose.
- flat top
- The range of prices, here $95 to $105, where a long condor makes the same most-it-can-make result on the last day.
- drawn crash scenario
- The course's example, not a forecast, where XYZ falls from $100 to $80 in 3 trading days and volatility doubles to 60%.
- break-even on either side
Check yourself
Answer each question to see why the right answer is right.
1. How much cash do you collect when you open this short strangle?
2. XYZ ends at $90 on the last day. What is your result?
3. Where do you make the most, and how much is it?
4. In the drawn crash, XYZ falls from $100 to $80 in 3 trading days and volatility doubles to 60%. Where would you be today?
5. XYZ is at $105 and days pass with nothing else changing. What happens to your result?
Finished the video and the quiz? .