Option StrategiesOptionsOptions strategies

Short Strangle Option Strategy

Written by Aaditya Shah (Individual Contributor)
Wed Mar 03 2021
Market XLS Short Strangle Strategy Template
See how MarketXLS helps you take advantage in the markets.
Download Option Templates →
Market XLS Short Strangle Strategy Template
 

A Short Strangle Option Strategy involves selling both OTM call and OTM put options in the same underlying asset with the same expiry date but with different strike prices. The investor needs to sell the OTM Call Option and OTM Put Option under this strategy. This strategy is useful when markets or the asset show less volatility and lie in a specific range.

Key features of the Short Strangle Option Strategy

Some of the critical aspects of a Short Strangle Option Strategy are as follows: –

  • Limited profit and unlimited risk

A Short Strangle Option Strategy clearly defines the upper and lower-level limits with the OTM call and put options. The net premium received by the investor is his maximum profit under this strategy. The investor would earn a profit only when the stock remains within the two strike prices.

Investors should note that any high volatility and sharp change in options price beyond the given limit would expose them to unlimited risk. Thus, when using this strategy, investors should take the decision carefully after proper analysis.

Short Strangle Option Strategy

  • Market neutral strategy

Market Neutral Strategy involves the investors profiting from both fall and rise in prices, thereby reducing the risk exposure. Short Strangle is a market-neutral strategy as it consists of placing both OTM call and OTM put options.

  • Options of the same asset with the same expiry date in the same ratio

 The options for which the investors enter an OTM position of buy and call for this strategy should be of the same asset and same expiry date. For example, the Investor is planning to use Short Strangle Option Strategy with the option of Microsoft. Here, the OTM Call and Put options should be both of Microsoft having the same expiry date.

The same ratio means that it can be 1:1, meaning that the investor sells 1 lot of Microsoft call option and 1 lot of Microsoft pull option. A ratio of 2:2 means selling 2 lots of Microsoft call option and 2 lot of Microsoft put option. Any uneven ratio such as 2:3 or 3:1 cannot be considered part of the Short Strangle Option Strategy.

Why should you use a Short Strangle Option Strategy?

Various reasons are influencing the decision for an investor to go for a Short Strangle Option Strategy. Some of the reasons are as follows:

a. Out of the Money (OTM) Options

OTM or Out of the Money Option refers to having a strike price higher than the market price of the underlying asset when entering a call position and vice versa for a put position. These options are less expensive than at-the-money (ATM) or in-the-money (ITM) options, making them cheaper for the investors. 

b. Expectations of Low Volatility

An investor can use the short strangle strategy when an option is expected to remain within a pre-defined range. As any movement beyond the pre-defined range will expose the investor to unlimited risk, the option should have low volatility.

c. Hedging market risk to a certain extent

A Short Strangle Strategy is a market-neutral strategy that consists of both OTM call and OTM put options. As a result, the risk for the investor is low as he is trading in both call and put positions.

Let us understand the entire concept of Short Strangle Option Strategy with a detailed example.

Person A is using a Short Strangle Option Strategy. The current share price of Microsoft is $245. So, Person A will use a short strangle strategy by selling OTM put option with a strike price of $240 and an OTM call option of $250. 

The opposite party, i.e., the buyer of put and call option, will exercise the option when the spot price of Microsoft share goes beyond $250 in case of a call option and below $240 in case of a put option.

Profit in Short Strangle Option Strategy

Person A will benefit when the stock price remains between 240 and 250 and thus, the option will remain unexercised by the buyer of sell and put option. Person A will receive his premium, and the option would expire

How to use Short Strangle Options Strategy using MarketXLS?

MarketXLS is an excel based platform with 600+ functions for stock and options analysis. Using a Short Strangle Option Strategy with the help of MarketXLS is quite simple. The user only needs to take the following steps in the template provided by MarketXLS:

  1. Mention Stock ticker
  2. Enter the Expiry date of the option. MarketXLS would provide a list of upcoming expiry dates adjacent to the input.
  3. Enter the OTM Strike price for the put and call option

Market XLS Short Strangle Strategy TemplateDisclaimer

None of the content published on marketxls.com constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person.

The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein.

The article is written for helping users collect the required information from various sources deemed to be an authority in their content. The trademarks if any are the property of their owners and no representations are made.

References

https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/short-

https://www.investopedia.com/articles/optioninvestor/08/strangle-strategy.asp

Interested in building, analyzing and managing Portfolios in Excel?
Download our Free Portfolio Template
Download Option Templates
Real gdpReal personal consumption expReal private investmentReal govt expenditureReal net exportsReal exportsReal importsFederal receiptsFederal outlaysFederal surplus or deficitFederal debtReal private investment nonresidentialReal private investment residentialReal potential gdpReal personal incomeReal personal consumption exp monthlyRpce durable goodsRpce nondurable goodsRpce servicesPersonal savings rateMonetary baseCurrency in circulationBank reservesMoney supply m1Money supply m2Sp500DjiaWilshire indexVixFinancial stress indexCorporate bond index aaCorporate bond index bbbFederal funds rateTreasury rate 3mTreasury rate 1yTreasury rate 5yTreasury rate 10yTips 5yTips 10yBond yield aaaBond yield baaMortgage rate 15yMortgage rate 30yUs dollar weighted averageUsdollar to euroUsdollar to poundYuan to usdollarCanadiandollar to usdollarYen to usdollarCpiCpi wo food energyCpi foodCpi energyChain price indexChain price index wo food energyGdp price deflatorPpi final demandPpi finished goodsPpi materialPpi crude goodsPpi final demand wo food energyPpi finished goods wo food energyHouse price indexHouse price index 20cityCrude oil priceGasoline priceNatural gas priceIndustrial productionCapacity utilisationInventoriesSales retail foodVehicle sales light weightManufacture orders durablesManufacture orders capital goodsLoansConsumer credit outstandingCorporate profitsHousing startsBuilding permitsResidential constructionEmployees nonfarmEmployees privateEmployees goods producingEmployees service providingEmployees governmentUnemployment rateInitial cliamsAverage weeks unemployedJob openingsHiresSeparationsQuitsLayoffs dischargesHours of productionHourly earningsReal outputPopulationLabor forceLabor force participation rate
Search for a stock

Top MarketXLS Rank stocks

Penske Automotive Group Inc. logo

Penske Automotive Group Inc.

108.01
 
USD
 
-0.39
 
(-0.36%)
84
Rank
Optionable: Yes
Market Cap: 8,953 M
Industry: Auto & Truck Dealerships
52 week range    
72.35   
   119.47
Zim Integrated Shipping Services Ltd logo

Zim Integrated Shipping Services Ltd

64.70
 
USD
 
0.94
 
(1.47%)
80
Rank
Optionable: Yes
Market Cap: 7,792 M
Industry: Deep Sea Freight Transportation
52 week range    
33.71   
   91.23
Universal Logistics Holdings Inc. logo

Universal Logistics Holdings Inc.

24.07
 
USD
 
-0.55
 
(-2.23%)
79
Rank
Optionable: No
Market Cap: 684 M
Industry: Trucking
52 week range    
15.86   
   26.90
NRG Energy Inc. logo

NRG Energy Inc.

45.72
 
USD
 
-0.49
 
(-1.06%)
79
Rank
Optionable: Yes
Market Cap: 10,725 M
Industry: Utilities - Independent Power Producers
52 week range    
31.94   
   46.86
Corteva Inc. logo

Corteva Inc.

59.23
 
USD
 
0.23
 
(0.39%)
79
Rank
Optionable: Yes
Market Cap: 41,692 M
Industry: Agricultural Inputs
52 week range    
40.60   
   62.04
Avnet Inc. logo

Avnet Inc.

46.30
 
USD
 
-0.27
 
(-0.58%)
78
Rank
Optionable: Yes
Market Cap: 4,732 M
Industry: Electronics Distribution
52 week range    
35.71   
   48.75
Universal Corporation logo

Universal Corporation

59.59
 
USD
 
-0.47
 
(-0.78%)
77
Rank
Optionable: Yes
Market Cap: 1,529 M
Industry: Tobacco
52 week range    
46.24   
   63.46
Kronos Worldwide Inc logo

Kronos Worldwide Inc

17.50
 
USD
 
-0.52
 
(-2.89%)
77
Rank
Optionable: Yes
Market Cap: 1,897 M
Industry: Specialty Chemicals
52 week range    
12.06   
   18.48
Boise Cascade L.L.C. logo

Boise Cascade L.L.C.

76.72
 
USD
 
-1.29
 
(-1.65%)
77
Rank
Optionable: Yes
Market Cap: 3,260 M
Industry: Lumber & Wood Production
52 week range    
46.51   
   85.17
Rollins Inc. logo

Rollins Inc.

35.28
 
USD
 
0.95
 
(2.77%)
76
Rank
Optionable: Yes
Market Cap: 17,428 M
Industry: Business Services
52 week range    
28.51   
   40.11

More Features

Stand with Ukraine

As the situation in Ukraine escalates, many of us in MarketXLS are left with emotions too overwhelming to name. If you’d like to show your support, but aren’t sure how to, we want to help make it easier for you to act.

For any amount donated, we’ll extend your MarketXLS subscription for double of the donated amount. Please send proof of your payment to support@marketxls.com to avail the extention

From all of us at MarketXLS, thank you!