The short strangle is a neutral strategy since profit is achieved from sideway movements of stocks. Short strangles are the same with the short straddles because you can both profit from a stagnant market. Similar with the short straddle, it has unlimited loss potential from either direction of the stock. It is less risky than the straddles although it has its own accompanying risks.
For example, stock ABC is trading at $130. Here are your near-the-money and at-the-money options:
Stock @ $130
Expirations are the same for the puts
|Sell 1 120 Put @ $4.50||($450.00)|
|Sell 1 70 Call @ $5.00||($500.00)|
You can sell the 120 put for 4.50 and the 140 for 5. Your maximum profit would be 9.50, minus the commission. With the stock between the 120 and 140, you will gain the premium form the options. If the stock is below the $110.50 or above the 149.50, you will lose from the position.
Value at Expiration:
|Stock Price||Profit (L)|
This can also be done using the in-the-money-options, also known as “guts”. Here is the example:
Sell one 120 call @ $14
Sell one 140 put @ $13.50
Here, at any price at least one of the options will have its intrinsic value. When the stock is between 120 and 140, the option will be $20. The maximum profit will be $750. The maximum profit in in-the-money is lower but the earning here is higher. The 120 call and the 140 put had $10 intrinsic value at $130. The premium for the in-the-money is therefore lower than the out-of-the-money.
|Option||Price||Intrinsic Value||Time Premium|
|Bullish Strategies||Neutral Strategies||Bearish Strategies|