Short Strangle is a strategy to be used when the investor is Neutral on the market direction and bearish on volatility expecting markets to trade in a narrow range.
This strategy involves selling an “Out-of-the-Money Call Option” and selling an “Out-of-the-Money Put Option”. Both options must have the same underlying security and expiration month.
Short Strangle is a slight modification to the Short Straddle. The profit payoff region is much wider as compared to Short Straddle.
If the underlying stock does not show much of a movement, the investor of the Short Strangle gets to keep the premium.
Investor view: Neutral on direction and bearish on volatility of the Stock/ Index.
Reward: Limited to net premium received.
Upper breakeven: Sell Call Strike price + net premium received.
Lower breakeven: Sell Put Strike price – net premium received.