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Interactive Options Course
Lesson 4 of 5
The short strangle is similar to the short straddle, though the strikes of the options differ. This is also a trade that benefits from decay and decreased volatility regardless of direction. Because the strike prices involved are further apart than a short straddle, there is a lower risk that this trade will cause the investor to face a loss. The lower associated risk means that the investor receives a lower premium at the outset for making the trade. As with a short straddle, profit is capped to the initial premium while loss is potentially unlimited. The short strangle makes maximum profits between the two strike prices and has two breakeven points. To the downside, the trade makes money if the stock stays above the lower strike price of the put minus the sum of the two premiums paid. To the upside the trade makes money if the stock stays below the upper strike price for the call plus the sum of the two premiums paid. Outside of these breakeven points the trade has unlimited loss potential in the event that the share price continues to increase or decrease, though the downside potential loss is limited by the fact that the share price could only fall to a minimum of zero.
Short Strangle example –
Market Outlook – Neutral
Volatility View – Decreases premium
Time Erosion – Reduces premium
Dividends – Neutral
Interest Rate – Neutral
Profit Potential – Limited
Loss Potential – Substantial from short put/ unlimited from short call
Components – Sell lower strike put and higher strike call option with same expiration
| Underlying Stock | $ 80.00 | Underlying Stock | Call P&L | Put P&L | Total P&L | |
| Call Strike | $ 85.00 | $ 10.00 | $ 300 | $ (6,250) | $ (5,950) | |
| Premium | $ 3.00 | $ 15.00 | $ 300 | $ (5,750) | $ (5,450) | |
| Put Strikes | $ 75.00 | $ 20.00 | $ 300 | $ (5,250) | $ (4,950) | |
| Premium | $ 2.50 | $ 25.00 | $ 300 | $ (4,750) | $ (4,450) | |
| Net Premium | $ 5.50 | $ 30.00 | $ 300 | $ (4,250) | $ (3,950) | |
| $ 35.00 | $ 300 | $ (3,750) | $ (3,450) | |||
| $ 40.00 | $ 300 | $ (3,250) | $ (2,950) | |||
| $ 45.00 | $ 300 | $ (2,750) | $ (2,450) | |||
| $ 50.00 | $ 300 | $ (2,250) | $ (1,950) | |||
| $ 55.00 | $ 300 | $ (1,750) | $ (1,450) | |||
| $ 60.00 | $ 300 | $ (1,250) | $ (950) | |||
| $ 65.00 | $ 300 | $ (750) | $ (450) | |||
| $ 70.00 | $ 300 | $ (250) | $ 50 | |||
| $ 75.00 | $ 300 | $ 250 | $ 550 | |||
| $ 80.00 | $ 300 | $ 250 | $ 550 | |||
| $ 85.00 | $ 300 | $ 250 | $ 550 | |||
| $ 90.00 | $ (200) | $ 250 | $ 50 | |||
| $ 95.00 | $ (700) | $ 250 | $ (450) | |||
| $ 100.00 | $ (1,200) | $ 250 | $ (950) | |||
| $ 105.00 | $ (1,700) | $ 250 | $ (1,450) | |||
| $ 110.00 | $ (2,200) | $ 250 | $ (1,950) | |||
| $ 115.00 | $ (2,700) | $ 250 | $ (2,450) | |||
| $ 120.00 | $ (3,200) | $ 250 | $ (2,950) |
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The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
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Options involve risk and are not suitable for all investors. For information on the uses and risks of options, you can obtain a copy of the Options Clearing Corporation risk disclosure document titled Characteristics and Risks of Standardized Options by going to the following link ibkr.com/occ. Multiple leg strategies, including spreads, will incur multiple transaction costs.
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Hey guys, please check straddle vs strangle wording in the quiz. Third question of third quiz accepts answer that would be correct for a strangle, but not for a straddle. And the lesson was about straddle. Strangle is only introduced in the subsequent lesson. Fourth question of forth quiz clearly talking about strangle, but says “strangle” mid text.
Hi, thank you for reaching out. This change is now reflected in the article.