A short strangle is an options trading strategy that involves simultaneously selling an out-of-the-money call option and an out-of-the-money put option on the same underlying asset, with the same expiration date. This strategy profits when the underlying asset’s price remains within a defined range, as both options expire worthless. It is a volatility-selling strategy.
Mechanism
The mechanism entails selling a call option with a strike price above the current market price and selling a put option with a strike price below the current market price. The trader collects premiums from both sales. The maximum profit is limited to the total premiums received, which occurs if the asset’s price stays between the two strike prices at expiration. Losses can be substantial if the asset moves significantly beyond either strike price.
Methodology
The strategic approach employs short strangles when a trader anticipates low volatility and limited price movement in the underlying crypto asset, such as Bitcoin or Ethereum. It aims to generate income from time decay (theta) as the options approach expiration. This methodology is used by institutional options traders seeking to capitalize on periods of market stability or implied volatility contraction, managing risk by setting stop-loss orders or hedging with other positions if the market moves against the anticipated range.
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