It
is used on stocks that are basically in a holding pattern in terms
of price volatility.
Important
notice
The
information on this web site is provided solely for general education
and information purposes and therefore should not be considered
complete, precise, or current. Trading
in stocks and options involves risk. You can lose money. You should
always seek professional advice from your stock broker. We are
not stockbrokers and do not make recommendations to buy or sell
any stock or option. We provide educational information for your
evaluation.
With
this strategy we will Write Call and Put
Options out of the money. We need to have the same amount of
contracts with the same expiration month, but different strike
prices.
With the Short strangle there is a net Credit because
we are writing (Selling), and not buying.
The Short
Strangle is considered a neutral play, because we are looking for
the stock to stay in between the strike
prices.
We would
look for a none volatile stock, as we are writers (Sellers).
We look for a stock pattern that can give us a range between the
strike prices.
Write (Sell) out of the money (OTM) Calls for a
particular month.
Write (Sell) out of the money (OTM) Puts for the same month as
the Calls.
Profits are made when the stock stalls in between the strike prices.
Maximum risk is based on the possibility to get a good stop loss
(The Put can bee infinite to 0).
XYZ Stock is trading at 33.00
Write (Sell) the May 35.00 strike price Call Options
at 0.94
Write (Sell) the May 30.00 strike price Put Options
at 0.56
Maximum profit is the Net Credit; 0.94 + 0.56 =
1.50
Break even level for
the Calls, strike price + Net Debit = 35.00 + 1.50 = 36.50
Break even level for the Puts, strike price + Net Debit = 30.00
- 1.50 = 28.50
When
writing options we have the responsibility to provide the XYZ
Stock at the Call strike price if it goes over it and we have
the responsibility to purchase the XYZ Stock if it goes under
the Put strike price.
No consideration was given to the cost of brokers fees and margin cost, etc.
