Snapshot
Legs
Sell 1 Out-of-the-Money Put + Sell 1 Out-of-the-Money Call
Outlook
Neutral / Low Volatility
Max profit
Net credit received
Max Loss
Unlimited to the upside, Substantial to the downside
A short strangle option strategy requires selling an out-of-the-money call option and an out-of-the-money put option simultaneously on the same stock with the same expiration date. You collect cash upfront for selling both options. This strategy works best when you expect the underlying stock price to stay within a specific price range and exhibit low movement until expiration.
Your maximum profit is limited to the total cash collected from selling both options, achieved if the stock stays between both strike prices until expiration. The potential loss, however, is substantial on the downside and unlimited on the upside if the stock makes a massive price move in either direction, making this a high-risk strategy.
Example
Stock
$100
Trade
- Sell $95 Put for $2.00
- Sell $105 Call for $2.00
→ $4.00 credit ($400)
Breakevens
$91.00 / $109.00
Outcomes
- Stock between $95 and $105: +$400 Max Profit
- Stock at $91 or $109: $0 Breakeven
- Stock outside the wings: Loss (e.g., -$300 at $112; -$600 at $85)