Credit: Image source: Author.Short strangle: A bet on low volatility
On the other hand, a short strangle involves simultaneously selling out-of-the-money calls and puts on the same stock with the same expiration. By doing so, you're betting on the exact opposite result that a long strangle is intended to achieve: You want the stock to stay right where it is.
Continuing my Apple example, let's say that you think Apple will be stuck close to $115 for the next month, so instead of buying, you decide to sell the same two options contracts I mentioned earlier, netting you $2.37 in premium income.
In this case, the premium you collect is your maximum profit. If Apple is between $110 and $120 at expiration, you keep the whole premium and the options you sold expire worthless. Your breakeven points are the same for the long strangle: $107.63 and $122.37. And, if Apple is lower or higher than those prices at expiration, you will have losses, which can be pretty large if the stock does make a big move.
In graphical form:
A quick recap
To sum it up, here's what you need to know about strangle option strategies:
A long strangle involves simultaneously buying out-of-the-money call and put options. If the stock price moves further than your breakeven point, you can make unlimited profit on the trade. If it doesn't, the most you can possibly lose is the money you paid for the options.
A short strangle involves simultaneously selling out-of-the-money call and put options. If the stock price stays in the range created by the difference in your strike prices, you earn your maximum profit, equal to the options premium you collected. If it moves outside of the range, your profits drop, and if it moves beyond your breakeven points, you start losing money. Losses with short strangles are unlimited, so proceed with extreme caution.
The $15,834 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $15,834 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
Matthew Frankel owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
