Short Strangle
Selling an out-of-the-money call and put to collect premium while accepting substantial tail risk.
What is a Short Strangle?
Selling an out-of-the-money call and put to collect premium while accepting substantial tail risk.
Construction
Sell a higher-strike call and lower-strike put with the same expiration, generally uncovered unless hedged elsewhere.
When it may be studied
To study advanced short-volatility exposure with a wider initial range than a short straddle.
Expiration profile
Maximum risk: Unlimited upside and substantial downside
Maximum reward: Total credit received
Break-even: Call strike plus credit; put strike minus credit
Worked example
Sell a 105 call and 95 put for $4. Simplified break-evens are $109 and $91. Losses grow beyond those levels.
Key risks and limitations
The premium can look attractive while hiding severe gap and tail risk. Margin requirements can expand when volatility rises.
Entry and exit checklist
- Confirm contract multiplier, expiration, exercise style, settlement, and liquidity.
- Calculate the maximum loss under the intended structure.
- Review earnings, dividends, corporate actions, and other event risks.
- Define an exit, adjustment, or expiration plan before entry.
- Understand what happens if one leg is assigned or exercised early.