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.

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