Neutral options strategy
Short strangle
Sell an out-of-the-money call and put. High probability of profit, but losses are unlimited on the call side.
NeutralHigh IV (selling rich premium)Undefined riskLevel 6 · Risk & trade management
Short strangle payoff
An example on a $100 stock with 30% implied volatility. The dashed line is the profit or loss at expiry; the solid line is what the position is worth today.
The trade
Sell 1 $91 put · 45 days · $0.93
Sell 1 $112 call · 45 days · $0.88
Net credit $181
Max profit$181
Max lossUnlimited
Break-evens$89.19 · $113.81
Chance of profit75%
How it works
- Max profit = both credits.
- The short call has no cap on its loss; the short put loses down to zero.
- Needs a margin account approved for naked options.
When to use it
- Experienced traders in high-IV markets, with small position sizes.
Managing the trade
- Common rules: 16-delta strikes, 45 days, close at 50%, never let one position be big enough to hurt the account.
Risks
- Gap moves (earnings, news) can cause losses many times the credit.
Unlimited-risk trades aren't available in the simulator yet. Practise the defined-risk version: the iron condor.