Short strangle stock option trading strategy

What us a short strangle?

The short strangle option trading strategy is Neutral option position that may be implemented when you think that the underlying security may be range-bound for a period of time and you are expecting very low volatility in the near term.

Strangle selling is a popular neutral option trading strategy and should only be considered when fair consideration has been given to proper risk management. Especially given the fact that the trader or investor is essentially maintaining two short option positions, one in the calls and one in the puts.

One of the benefits of selling a strangle option position is with regard to the fact that you can participate in the underlying stock trading in a range. And take advantage of times when the stock is experiencing low volatility.

Always consider when going "short"(selling) call and Put options the fact that time decay has a positive impact on both legs of the position. Every day that passes by further erodes the time (measured through theta) portion of the options premium which is benefitial to a short option position.

Also keep in mind that any rise in implied volatility (IV) will have a negitive impact on both the short call option and short Put option contracts. When selling a short strangle option position you are considered short volatility. (Implied Volatility is measured through Vega).

(Theta and Vega are very important regarding the purchase and selling of option contracts).

The chart above is an illustration of the following example. Notice how the position has two break-even points--

~sell 1 40 strike Put option contract @ $2.50 ask.

~sell 1 60 strike Call option contract @ $2.50 ask.

~Total credit excluding commission= $500.

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