Guide to Options Strangles

Guide to Options Strangles

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A strangle is an investment strategy in which a trader holds both a call and put option with the same expiration date but different strike prices.

In a strangle strategy, a holder in effect, combines the features of both a call and a put option into a single trade, and the overall position is the net of the two options.

If you believe that a stock is about to make a large price movement, then using a long strangle strategy may be beneficial for you. This approach bets that the stock will experience significant growth or decline in value.

If you think that a stock is likely to be flat then a SHORT strangle might be very useful for you.

In this short guide, I hope to give you a concise overview of this style of trading with special focus on the short strangle – selling the call and put.

The short strangle has proved particularly profitable for my friend Lance in where he alerts his members when he places this style of trade (and many other styles!).

Lance has been trading for 15 years and is an expert at strangles, spreads and selling options to collect passive income.

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How a Strangle Works

There are two types of Strangles – Long and Short. If you are a seller of options then you will only be interested in the short strangle.


The Long Strangle

The long strangle is an investing strategy where both a call and put with different strike prices – but the same expiration date – are bought at the same time.


Usually, the call option has a higher strike price than what the underlying stock is currently trading for, while the put option’s strike price is lower than market value.


With this trading strategy, you have the potential to make money (unlimited!) no matter which direction the market goes. You’ll start making a profit as soon as the asset moves past your break-even point.


The worst-case scenario is restricted to the total amount paid for both options, and it happens when the expiration price of the underlying asset falls between the strike prices.


A long strangle has 2 break-even points – the call strike option’s market price plus the debit, and the strike price of the put option less the debit.


The time decay’s effects are significant for a long strangle. Prior to expiration, if there is more volatility, the value of the strangle will increase, and vice versa.


Short Strangle: Neutral or Sideways Strategy

A short strangle is when a trader SELLS to OPEN a call and put option at different market strikes, but with the same expiration date.

This strategy is advantageous for traders because they collect a premium from the sale of both options.

Lance in uses this strategy successfully.


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The only condition required for maximum profits is that the price of the underlying asset must stay between the two strike prices, and then both options expire with maximum profit for the trader.


The short strangle strategy is used by investors when they expect the price of the underlying stock to fluctuate within a range. This results in the time decay of both options.


If the price goes up beyond the strike price for call options, or if it falls below the put options’ strike price, then that option will be exercised and cause a loss in the short strangle.


When the strike prices of two options are both below and above the actual current price of the asset, the options writer (seller) will make maximum profit.


Since the options will not be exercised by the holder, the back-and-forth fluctuation leads to a profit.


There are two break-even points for a short strangle: the sum of the premium collected and the market price of the short call, and the strike price of the short put less the collected premium.


A short strangle is put in place when the trader expects limited movement from the underlying stock, and they will profit if this occurs.


The maximum amount that can be earned is the total premium received minus commissions, but there is unlimited potential for loss if the stock price falls too much. You can of course use a stop loss….


Some traders find the idea of “selling a strangle” appealing because it seems like an easy way to make money – collect two option premiums and sit back until the stock makes a large enough move.


Prices of strangles will give you a good idea of how much stock prices are likely to change before expiration.


What happens as the stock price changes?


When the stock price is between the strike prices of the strangle, the negative delta of the short call and positive delta of the short put very nearly offset each other.


Therefore, a small change in the stock price between the strikes doesn’t cause much fluctuation in the price of a strangle.


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A strangle having a “near-zero delta” means that the strangle price isn’t very responsive to changes in the stock price.


A short strangle starts to lose money when the stock price either “rises too fast” or “falls too fast.”


This happens because the price of a call option and put option tend to move in opposite directions.


When the stock price rises, the short call will lose value more than the put gains. Similarly, when the stock price falls, the short put will lose value more than the call gains.


“Negative gamma” is simply another way of saying that the delta of a position will change in the opposite direction to how the stock price changes. Gamma estimates how much this delta will change in relation to fluctuations in stock prices.


As the stock price increases, the overall delta of a short strangle becomes more negative. This is because the delta of the short call position becomes more negative while the delta of the short put position approaches zero.


In the same way, when stock prices go down, the overall difference of a short strangle becomes increasingly positive. This is because as the stock price falls, the value of a put increases while simultaneously the call option decreases to zero.


How Changing Volatility Effects Short Strangle Price

Volatility indicates how much a stock’s price varies in percentage terms. When volatility is high, option prices usually go up too if other conditions such as the stock price and expiration date stay unchanged.


Short strangles make money when the underlying price is relatively stable and volatility falls. On the other hand, short strangles lose money if there is an increase in volatility or a significant movement in either direction of the underlying stock price.


Negative vega is an options term that referring to how much an option price changes in reaction to the level of volatility. In other words, a position loses when market volatility increases, and gains when it decreases.


So, short strangles lose money if there is a big increase in volatility.


How Does Time Decay Effect a Short Strangle?

An option’s total price decreases as expiration approaches due to the time value portion of the price. This is called time decay.

Because short strangles involve two different options, they are more susceptible to time decay than positions with only one option.


This is a GOOD thing.


Short strangles often make a profit rapidly as time passes and the stock price doesn’t waver


Risks: Early Assignment

When you enter into a short stock option position, always be aware of the real risk of early assignment. This is because in the United States, holders of these positions have no control over when they will be required to fulfill their obligations. Options can be exercised on any business day.


Short strangles have early assignment risk for both the short call and the short put. Early assignment of stock options is usually due to dividends.



Short calls that are assigned early are usually assigned on the day before the ex-dividend date. In-the-money calls with a time value less than the dividend have a high likelihood of being assigned.

If the stock price is higher than the strike price of the call when you use a short strangle, think about if early assignment might happen.

If it does look possible and being short on stocks isn’t something you want, then take care to stop assignment from happening (which would include buying the short call and keeping open the short put or shutting down the entire strangle).

Puts that are assigned early are more likely to be assigned on the ex-dividend date. Puts whose time value is less than the dividend have a greater chance of being assigned. Therefore, if the stock price falls below the strike price of the put in a short strangle, you must decide if early assignment is probable.


If it appears likely that your options will be assigned, and you don’t want to hold a long stock position, then take action before the assignment occurs. This involves either buying the short put and keeping the short call open, or closing the entire strangle.


If early assignment of a stock option occurs, then either the corresponding stock is purchased (short put) or sold (short call).


If no offsetting stock position exists, then one is created. However, if the resulting stock position is not wanted, it can be closed out in the marketplace through selling or buying.


However, please take note that the date of the closing stock transaction will be one day after the date of the opening stock transaction (from assignment).


This one-day discrepancy will lead to additional fees, including interest rates and commissions. If there is not enough account equity to support the stock position, then assigning a short option might also trigger a margin call.


Covered Strangles: How to Avoid Potentially Unlimited Losses!

A strangle position becomes covered when an investor buys (or already owns) stock and then selling both an out-of-the-money call and put.


The call and put have the same expiration date. If, at the expiration date, the stock price is higher than the strike price of the short call, then maximum profit is achieved.


Using a covered strangle helps to mitigate losses. It is one of Lance’s favorite strategies.


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I hope that you found this short guide useful. I hope if you are not already familiar with these strategies that they might seem less intimidating now.

If you want more guidance on selling spreads, strangles and cash secured puts I recommend coming and checking out on the 1 week free trial.




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