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A strangle trade is where you buy an Out-The-Money put whilst simultaneously buying an OUT-THE-Money call or vica-versa

If you are short strangles, it is a strategy that profits when the stock stays between the short strikes as time passes, as well as any decreases in implied volatility. The short strangle is an undefined risk option strategy.

  • Sell OTM Call
  • Sell OTM Put

Max Profit: Credit received from opening trade

How to Calculate Breakeven(s):

  • Downside: Subtract total credit from short put
  • Upside: Add total credit to short call

With strangles, it is important to remember that you are working with truly undefined risk in selling a naked call. We focus on probabilities at trade entry, and make sure to keep our risk / reward relationship at a reasonable level.

Implied volatility (IV) plays a huge role in our strike selection with strangles. The higher the IV, the wider our strangle can be while still collecting similar credit to a strangle with closer strikes that is sold in a lower IV environment. If we choose to keep our strikes closer to the stock price, a higher IV environment will yield a much larger credit, as IV is essentially a reflection of the option prices.

QUIZ TIME

Test your skills with are questionnaire and challenge the waves.

If I sell an Apple 125/250 strangle for $2 what is my maximum profit?

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