Short Strangle

Outlook: Neutral

Short Strangle -   Sell Lower Strike Put, Sell Higher Strike Call
             
Strategies...

•         Sell lower strike Puts (OTM)
•         Sell Higher Strike Calls (OTM)
•         Looking for sideways movement of the stock.       
•         Make profit with rangebound in stock trend

    
Example...

Best Buy Co., Inc.(NYSE:BBY) is traded at $18.30 on June 1, 2012. To short a strangle,

•     Sell June 16, 2012 $20 Call at $0.15.
•     Sell June 16, 2012 $17 Put at $0.23.

Short Strangle

Short Strangle

  
Advantages...

•     Profit from sideways movement of stock.
•     Receive options premium immediately

Disadvantages...

•    High-risk strategy and unlimited loss.
•    Uncapped risk

Maximum Profit:          $0.15 + $0.23 = $0.38
                                     (Call Premium + Put Premium)

Maximum Loss:           Uncapped
                             
Breakeven Up:             $20.00 + $0.38 = $20.38
                                     (Higher Strike Price +  Premium gain)

Breakeven Down :       $17.00 - $0.38 = $16.62                                 
                                    (Lower Strike Price - Premium gain)