Options Strategies

Strategy Number 11 - Short "Strangle"

Market dATA
DJ Index 100 points
Prices
Call 120 $500

Put 80 $500
Strategy name:

Short "Strangle".

Recommended use of strategy

Expectation of relative stability of the DJ Index. Similar to the Short Straddle strategy.

Strategy components

  1. Writing a Short Call option outside-the-money (at a strike price which is higher than the DJ Index).
  2. Writing a Short Put option outside-the-money (at a strike price which is lower than the DJ Index).

For example: Selling a Short Call 120 option at a price of $500, and selling a Short Put 80 option at a price of $500.

Expenses / Income from building the strategy

Income of $1,000.

Strategy graph:

1

Auxiliary table for building the profit line

 

DJ Index

(Horizontal axis)

(Fixed expense) / fixed income

Variable expenses

(Call contribution)

Variable expenses (Put contribution)

Total profit / (loss)

(Vertical axis)

2+3+4

Œ



Ž





50

$1,000

-

($3,000)

($2,000)

60

$1,000

-

($2,000)

($1,000)

70

$1,000

-

($1,000)

$0

80

$1,000

-

-

$1,000

90

$1,000

-

-

$1,000

100

$1,000

-

-

$1,000

110

$1,000

-

-

$1,000

120

$1,000

-

-

$1,000

130

$1,000

($1,000)

-

$0

140

$1,000

($2,000)

-

($1,000)

150

$1,000

($3,000)

-

($2,000)

Strategy analysis:

Source of Loss          

We lose on a sharp change in the DJ Index. When the index goes up we lose on the Short Call we have written. When the index goes down we lose on the Short Put we have written.

Source of profit        

Income from building the strategy. The profit is maximized when the DJ Index moves in narrow range, and is limited to the amount received from building the strategy.

Break-even point     

When the loss from the Call option or from the Put option equals the income from writing the options totaling $1,000. This occurs when the index is at 130 points or 70 points.

Strategy Number 11 - Short "Strangle"530Strategy Number 11 - Short "Strangle"