Short Strangle

1. Definition

A Short Strangle is a neutral strategy where an investor simultaneously sells (writes) an Out-of-the-Money (OTM) Call and an Out-of-the-Money (OTM) Put with different strike prices. It aims to profit from the stock price staying within a specific range.

2. Market View

• Range-bound: The trader doesn't need the stock to stay perfectly still (like in a Short Straddle). As long as the stock doesn't breakout beyond the outer strike prices, the trade is profitable.

3. Setup

Assuming stock price is $100: * Action: Sell Put (Strike $90) + Sell Call (Strike $110). * Cash Flow: Net Credit (Collect premiums upfront, though less than a Straddle).

4. Profit & Loss

4.1. Max Profit

Limited Occurs if the stock price closes anywhere between the two strike prices ($90 - $110) at expiration. The trader keeps the full premium.

4.2. Max Loss

Unlimited If the market makes a drastic move outside the range (e.g., shoots up to $150 or crashes to $50), the losses can be theoretically infinite.

5. Characteristics

It offers a very high probability of profit because the "winning zone" is wide. However, it still carries the risk of unlimited loss if a major market event causes a breakout.