Short one OTM Call
Short one OTM Put
Short one put option with a lower strike price and short one call option at a higher strike price.
Maximum Loss: Unlimited as the market moves in either direction.
Maximum Gain: Limited to the net premium received for selling the options.
When to use: When you are bearish on volatility and think market prices will remain stable.
A short strangle is similar to the Short Straddle except the strike prices are further apart, which lowers the premium received but also increases the chance of a profitable trade.
Comments (4)
Peter
November 17th, 2011 at 4:17pm
It depends how far out of the money the options are and how close to expiration. If the strikes are 10% either side of the stock price you will likely not have any problems finding a buyer.
Roshan
November 17th, 2011 at 8:41am
Peter Thanks once you have been very helpful.
just one more question.
I would be using OTM options for short strangle. So what is the probability or even a possibility that I will find a buyer when I get into short strangle.
Peter
November 17th, 2011 at 4:20am
Hi Roshan,
Yes, for any short positions your broker will require capital for the trade, which is called a margin. The margin is to protect the broker/clearer (and hence the trading counterparty) from large losses as a result of unfavourable moves in the underlying.
Roshan
November 17th, 2011 at 12:24am
Hi Peter,
I would like to know if i should be having any capital in my account while getting into a short strangle position in any individual stock.
will the premium be credited to my account immediately on entering into the short strangle position.
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