Short Strangle is a strategy wherein the investor simultaneously sells an Out of the Money Call option and an Out of the Money Put option of the same underlying security and same expirty.
When to use this strategy?
This strategy is used when the investor is neutral on the underlying security and is expecting very little volatility in the short term.
How to build this strategy?
This strategy has 2 legs:
Leg 1 – Sell 1 OTM Call
Leg 2 – Sell 1 OTM Put
Credit Spread/Debit Spread
This is a Credit Spread Strategy.
The profit potential of this strategy is limited.
When is this strategy profitable?
The investor earns maximum profit when the price of the underlying security at expiry is between the strike prices of the call and put options sold.
The investor faces unlimited risk in this strategy.
When is this strategy unprofitable?
The investor stands to make large losses if the price of the underlying security moves sharply in either direction.