A Short Strangle is a slight modification to the Short Straddle. It tries to improve the profitability of the trade for the seller of the options by widening the breakeven points so that a greater movement is required in the underlying stock/index for the Call and Put option to be worth exercising.
This strategy involves the simultaneous selling of a slightly out-of-the-money (OTM) Call and a slightly out-of-the-money (OTM) Put of the same underlying stock/index and expiration date.
[OTM Put - When the put option's strike price is lower than the prevailing market price of the underlying stock.
OTM Call - When the call option's strike price is higher than the prevailing market price of the underlying stock.]
This typically means that since an OTM Call and Put are sold, the net credit received by the seller is less as compared to a Short Straddle, but the break-even points are also widened. The underlying stock must move significantly for the Call and the Put to be worth exercising. If the underlying stock does not show much of a movement, the seller of the Strangle gets to keep the premium.
When to Use: This options trading strategy is taken when the options investor thinks that the underlying stock will experience little volatility in the near term.
Risk: Unlimited
Reward: Limited to the premium received
Breakeven:
Upper Breakeven Point = Strike Price of Short Call + Net Premium Received
Lower Breakeven Point = Strike Price of Short Put - Net Premium Received