Options Trading Strategies: Short Strangle

The short strangle (otherwise called a sell strangle) is a two-legged strategy, created by selling one Out of The Money put and one Out of The Money call, both with the same expiration date.

A short strangle is an adaptation of a short straddle which increases the probability of a trade, and an opposite of a long strangle.

When to use this strategy?

You are direction neutral and bearish on volatility, you expect minimal to no movement in the BTC/ETH price and looking for an income strategy.

Below is a Profit and Loss chart example of a short strangle options strategy:

Pros:

Relatively high profit income strategy.

Cons:

Maximum profit is capped, and maximum loss is uncapped.

Example:

In this example, BTC is trading at 43,769.62 USD, and you expect stagnation or a small movement in price in either direction. You have sold an OTM put with a strike price 43,000.00 and an OTM call with a strike price of 45,000.00 USD, with an expiration date of February 11^th 2022.

As this is a net credit spread you have received a net premium of 1,114.71 USD which is also your maximum profit.

The Profit and Loss chart is given below:

Upon expiration:

If the BTC price is below the OTM put strike price, the call expires worthless, the put is assigned, you are in the profit as long as the bitcoin price ends up above the first break-even point.

If the BTC price is at any or between the strike prices then both the call and the put expire worthless, and you are at your maximum profit.

If the BTC price is above the OTM call strike price, the put expires worthless, the short call is assigned, you are in the profit as long as the bitcoin price ends up below the second break-even point.

BTC at Expiry (USD)	Payoff (USD)
40,440.00	-1,445.29
41,339.00	-546.29
41,885.29 (break even 1)	0
42,469.00	+583.71
43,000.00 & 45,000 (SP OTM & SC OTM)	+1,114.71 (max gain is between strikes)
45,566.00	+548.71
46,114.71 (break even 2)	0
46,686.00	-571.29
47,562.00	-1,447.29