Name: Short Strangle
Setup: Sell (short) Strike A put and Sell (short) Strike B call
Bias: Neutral
Break-Even: Two break-even points:
- Strike A – Credit received
- Strike B + Credit received
Max Profit: Limited: Credit received
Max Loss: Unlimited
Margin: The margin requirement is the greater margin between the short put or the short call plus the credit received
Time Decay: Time decay is a positive effect. You are looking for both sides of your spread to expire worthless.
Implied Volatility: After the play has been established you want implied volatility to decrease thus lowering the value of your options. This will also lower the chance of seeing a large move in either direction.
Notes: Short Strangle is a good play to put on when you expect a decrease in implied volatility. Be careful when placing this play because you are exposed to unlimited risk on both sides.
Featured in Trade Review: None at this time