A short strangle is a neutral strategy that profits when the stock stays between the short strikes as time passes, as well as whether there are any decreases in implied volatility. The short strangle is an undefined risk option strategy.

Directional Assumption: Neutral

Setup:

  • Sell OTM Call
  • Sell OTM Put

Ideal Implied Volatility Environment: High

Max Profit: Credit received from opening trade 

How to Calculate Breakeven(s): 

  • Downside: Subtract total credit from short put
  • Upside: Add total credit to short call 

With strangles, remember that there’s truly undefined risk in selling a naked call. Focus on probabilities at trade entry, and keep the risk/reward relationship at a reasonable level. 

Implied volatility...

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