Strategies

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Weekly Strategy Discussion

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.

Short Strangle

Example:                 XYZ stock is trading at $100 

Outlook:                  You don't anticipate a significant move either up or down over the next 30 days and you expect a possible decrease in implied volatility.

Possible strategy:    Sell the Strangle                             

                                  Sell one 30 day 110 strike call at $1.00

                                  Sell one 30 day 90 strike put at   $0.75

                                                                  Net Credit $1.75

 

*All values shown are at the time of expiration. Commissions and other trading fees not included.

Stock

Sell 110 Call

Profit/(Loss)

Sell 90 Put

Profit/(Loss)

Net Profit

(Loss)

80

$1.00

($9.25)

($8.25)

90

$1.00

$.75

$1.75

100

$1.00

$.75

$1.75

110

$1.00

$.75

$1.75

120

($9.00)

$.75

($8.25)

 

 

At Expiration:

  • Maximum Profit = Net Credit
  • Maximum Profit = $175
  • Upside Breakeven = Call Strike Price + Net Credit
  • Upside Breakeven = $111.75
  • Downside Breakeven = Put Strike Price - Net Credit
  • Downside Breakeven = $88.25
  • 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 30 days or a major increase in volatility.  Special approval from your broker may be required to sell naked options.

CBOE Volatility Index (VIX)