Short Strip Strangle

How does a Short Strip Strangle work in Options Trading?

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Short Strip Strangle - Introduction

The Short Strip Strangle, is a Short Strangle which writes more put options than call options and has a bullish inclination. As a Neutral Options Strategy, Short Strip Strangles are useful when a stock with a neutral outlook is assessed to have a higher chance of breaking out to upside than downside. Short Strip Strangles transfers some of the downside risk to upside, creating an asymmetric risk graph that makes a lower loss if the stock breaks to upside than upside. Short Strip Strangles also make a higher maximum profit than a regular short Strangle due to the fact that the minimum amount of short options are more than a regular short Strangle. It is this flexibility in transferring risk that makes options trading so versatile.

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Main Differences Between Short Strip Strangle and Regular Short Strangle

The main difference between the Short Strip Strangle and the regular short Strangle options trading strategy is that short Strip Strangles writes more put options than call options. A regular short Strangle writes the same number of out of the money put options and call options and has a symmetrical risk graph with equal loss to upside and downside. Short Strip Strangles writes more out of the money put options than call options, resulting in an options trading risk graph with steeper loss to downside than upside. Short Strip Strangles would also have a farther upside breakeven point than downside as there are more put options to overcome the premium gain of the lesser call options.

Short Strip Strangle Versus Regular Short Strangle Example Assuming QQQQ trading at $43.00. Regular Short Strangle Sell To Open 1 contract of Jan $44 Call at $0.75 Sell To Open 1 contract of Jan $42 Put at $0.75. Net Credit = $0.75 + $0.75 = $1.50 Short Strip Strangle Sell To Open 2 contracts of Jan $44 Call at $0.75 Sell To Open 1 contracts of Jan $42 Put at $0.75. Net Credit = $0.75 x 3 = $2.25

The regular short Strangle can also be given a bearish inclination through writing more call options than put options, creating a Short Strap Strangle. Short Strap Strangle and Short Strip Strangle are the two variants of the Short Strangle options trading strategy that options traders can use to introduce a bearish or bullish inclination.

When To Use Short Strip Strangle?

One should use a Short Strip Strangle when one speculates that a stock would go sideways but if it breaks out, it will most probably to downside.

How To Use Short Strip Strangle?

Sell to Open 2 x Out of The Money (OTM) Call Options and Sell to Open Out of The Money (OTM) Put options.

Short Strip Strangle Versus Regular Short Strangle Example Assuming QQQQ trading at $43.00. Short Strip Strangle Sell To Open 2 contracts of Jan $44 Call at $0.75 Sell To Open 1 contracts of Jan $42 Put at $0.75. Net Credit = $0.75 x 3 = $2.25

Trading Level Required For Short Strip Strangle

A Level 5 options trading account that allows the writing of naked options is needed for the Short Strip Strangle. Read more about Options Account Trading Levels.

Profit Potential of Short Strip Strangle :

Short Strip Strangles make their maximum profit when the stock closes at the strike price of the options upon expiration.

Profit Calculation of Short Strip Strangle:

Maximum Profit = Net Credit

Maximum Loss = Unlimited as long as the stock keep rising or falling.

From the above example : Maximum Profit = $2.25

Risk / Reward of Short Strip Strangle:

Upside Maximum Profit: Limited

Maximum Loss: Unlimited

Breakeven Points of Short Strip Strangle:

A Short Strip Strangle makes a profit if the stock stays between its upper breakeven point and lower breakeven point.

Upper Breakeven Point = Call Strike + net credit

Lower Breakeven Point = Put Strike - (net credit/[number of put options/number of call options])

From the above example : Upper Breakeven Point: 44 + 2.25 = $46.25 Lower Breakeven Point: 42 - (2.25/[2/1]) = 42 - 1.12 = $40.87 You would notice at this point that a Short Strip Strangle has a closer lower breakeven point than its upper breakeven point. This is the effect of writing more put options than call options. This allows the Short Strip Strangle to remain in profit longer if the stock go upn, hence giving it a bullish inclination.

Advantages Of Short Strip Strangle:

Higher profit than a regular short Strangle.

Farther upper breakeven point.

Disadvantages Of Short Strip Strangle:

Higher margin requirement than a regular short Strangle since more options are written.

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