What is a short strangle?

A short strangle is an advanced options trading strategy used by traders who predict minimal movement or stability in the price of the underlying asset until the options reach expiration. This approach involves selling, or ‘writing’, both a put option and a call option concurrently. These options possess identical expiration dates but different strike prices.

In a short strangle strategy, traders sell an out-of-the-money call option with a higher strike price and an out-of-the-money put option with a lower strike price. The primary goal is to capitalise on the time decay or erosion of the options’ values due to limited price fluctuations in the underlying asset.

Traders implementing a short strangle anticipate that the underlying asset’s price will remain relatively stagnant within a specific range until the options expire. As long as the price stays within this anticipated range, both the call and put options will likely expire worthless. This scenario allows the trader to retain the premiums received from selling the options as profit.

However, if the asset price significantly moves beyond the anticipated range, the trader may face substantial losses, as either the call or put option could be exercised, resulting in significant financial liability. Therefore, traders employing this strategy must monitor market conditions and be prepared to manage positions in response to unexpected price movements.

To find out what is a long strangle click here. What is a long strangle?