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Sell Strangle
A strangle sale is the sale of a call and a put in different strikes within
the same contract month.
It is generally an OTM call and an OTM put, but not limited to such. Since both
options are sold the seller will always collect a premium. This is a market
neutral, limited reward/unlimited risk strategy. This strategy is normally used when the trader believes
implied volatility is to0 high and/or the underlying market is entering a consolidation
period. It has much the same characteristics as a straddle sale but assuming OTM sales of
puts and calls, it leaves room between the strikes for price to move, though the
premium
collected will be less.
Breakeven point occurs at expiration when the price of futures is the same distance above the call strike or below the put strike as the premium received.
Maximum profit = premium received.
Maximum loss = unlimited to the extent the underlying market can move above the call strike or below the put strike, minus premium received.
- In The Money: One or both of the strikes may be ITM
- At The Money: Technically, a strangle can't be at the money because two different strikes are sold, however, it is often referred to as ATM if either the put or call strike is equal to the futures price.
- Out Of The Money: The most common use with call strikes higher than future prices and put strikes below future prices.
- Delta is negative above call strike and positive when below put strike. The volatility slope (difference between volatility in different strikes) can affect the deltas when the futures price is not clearly closer to one strike.
- Gamma is negative. Price movement hurts.
- Vega is negative. Higher implied volatility hurts.
- Theta is positive. The passage of time helps.
