Covered Short Strangle – The Option Strategy Desk Reference

Covered Short Strangle

Strategy: Buy or Own n × 100 Shares,

Sell n OTM Calls, Expire 56 DTE

Sell n OTM Puts, Same Expiry

Example:

Price Chart: Moving sideways (neutral) to slightly upward

Current IV%: 40% (to increase premium values)

IV Rank: 50

Trade: Sell n OTM put options; sell n OTM call options. (All options expire 56 DTE.)

Typical Strike Deltas:

Short OTM Calls 0.25

Short OTM Puts 0.25

Goals: Premium collection from short options placed 1 standard deviation or more OTM at strikes that are unlikely to become ITM prior to expiration.

Manage: Monitor this trade to ensure that the strikes of the short put and short call options remain safely OTM. If a price rally moves close to the short call, the covering stock will benefit from the price increase. This may encourage the trader to sell the stock and buy to close the short puts and short calls. The short puts may also be held until they expire worthless. If the short call options remain OTM, consider trading another covered short strangle or a covered call. If the stock price drops, the short put should be closed to prevent it from being exercised and the short call options should be retained, rolled for profit, or, as mentioned, permitted to expire worthless.

Profit: Close when the short options achieve a profit of 50 percent or more or let these short options expire worthless for 100 percent profit. If the price of the underlying rallies, consider collecting additional profit by selling the stock.

Loss: Close one of the short options if it approaches the ATM strike. This can result in a net loss in premium exceeding 30 percent.