The Weekly Strategy Discussion is designed to assist individuals in learning how
options work and in understanding various options strategies. Options involve risk and are not suitable
for all investors. The strategies discussed are for educational and illustrative purposes
only, and should not be construed as an endorsement, recommendation or solicitation to buy or
sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.
View Options Institute Instructor Peter Lusk illustrate this strategy on CBOE-TV!
Short Strangle
Example: XYZ stock is trading $65.
Outlook:You don't anticipate a significant move either up or down over the next three weeks and you expect a possible decrease in volatility.
Possible strategy:Sell the Strangle
Sell one July 70 strike call at $2.40
Sell one July 60 strike put at $2.05
Net Credit $4.45 ($445)
*All values shown are at the time of expiration .Commissions and other trading fees not included.
Stock
|
Sell 70 Call
Profit/(Loss)
|
Sell 60 Put
Profit/(Loss)
|
Net Profit
(Loss)
|
50
|
$2.40
|
($7.95)
|
($5.55)
|
55
|
$2.40
|
($2.95)
|
($.55)
|
60
|
$2.40
|
$2.05
|
$4.45
|
65
|
$2.40
|
$2.05
|
$4.45
|
70
|
$2.40
|
$2.05
|
$4.45
|
75
|
($2.60)
|
$2.05
|
($.55)
|
80
|
($7.60)
|
$2.05
|
($5.55)
|
At Expiration:
Maximum Profit = Net Credit
Maximum Profit = $445
Upside Breakeven = Call Strike Price + Net Credit
Upside Breakeven = $74.45
Downside Breakeven = Put Strike Price - Net Debit
Downside Breakeven = $55.55
Maximum Loss = Unlimited
In Summary: The Short Strangle has limited profit potential but unlimited risk.Substantial losses are possible with a big move in XYZ stock over the next three weeks or a major increase in volatility.Special approval from your broker may be needed to sell naked options.
View Options Institute Instructor Peter Lusk illustrate this strategy on CBOE-TV!