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Short Put Vs Covered Strangle Options Trading Strategy Comparison

Compare Short Put and Covered Strangle options trading strategies. Find similarities and differences between Short Put and Covered Strangle strategies. Find the best options trading strategy for your trading needs.

Short Put Vs Covered Strangle

  Short Put Covered Strangle
Short Put Logo Covered Strangle Logo
About Strategy A short put is another Bullish trading strategy wherein your view is that the price of an underlying will not move below a certain level. The strategy involves entering into a single position of selling a Put Option. It has low profit potential and is exposed to unlimited risk. A short put strategy involves selling a Put Option only. For example if you see that the shares of a Company A will not move below Rs 1000 then you sell the Put Option of that stock at Rs 1000 and receive the premium amount. The premium received will be the maximum profit you can earn from this trade. However, if the price of the underlying moves below 1000 then you will incur unlimited losses. The covered strangle option strategy is a bullish strategy. The strategy is created by owning or buying a stock and selling an OTM Call and OTM Put. It is called covered strangle because the upside risk of the strangle is covered or minimized. The strategy is perfect to use when you are prepared to sell the holding or bought shares at a higher price if the market moves up but would also is ready to buy more shares if the market moves downwards. The profit and in this strategy is unlimited while the risk is only on the downside.
Market View Bullish Bullish
Strategy Level Beginners Advance
Options Type Put Call + Put + Underlying
Number of Positions 1 3
Risk Profile Unlimited Limited
Reward Profile Limited Limited
Breakeven Point Strike Price - Premium two break-even points

When and how to use Short Put and Covered Strangle?

  Short Put Covered Strangle
When to use?

Short Put works well when you're Bullish that the price of the underlying will not fall beyond a certain level.

A covered strangle strategy can be used when you are bullish on the market but also want to cover any downside risk. You are prepared to sell the shares on profit but are also willing to buy more shares in case the prices fall.

Market View Bullish

When you are expecting the price or volatility of the underlying to increase marginally.

Bullish

The Strategy is perfect to apply when you're bullish on the market and expecting less volatility in the market.

Action
  • Sell Put Option

A short put strategy involves selling a Put Option only. So if you see that the shares of a Company A will not move below a 1000 then you sell the Put Option of that stock at 1000 and receive the premium amount. The premium received will be the maximum profit you can earn from this deal. However, if the price of the underlying moves below 1000 than you will incur losses.

Buy 100 shares + Sell OTM Call +Sell OTM Put

The covered strangle options strategy can be executed by buying 100 shares of a stock while simultaneously selling an OTM Put and Call of the same the stock and similar expiration date.

Breakeven Point Strike Price - Premium
two break-even points

There are 2 break-even points in the covered strangle strategy. One is the Upper break even point which is the sum of strike price of the Call option and premium received while the other is the lower break-even point which is the difference strike price of short Put and premium received.

Compare Risks and Rewards (Short Put Vs Covered Strangle)

  Short Put Covered Strangle
Risks Unlimited

There is no limit to losses incurred in the trade. The risk is when the price of the underlying falls, and the Put is exercised. You are then obliged to buy the underlying at the strike price.

Limited

The risk on this strategy is only on the downside when the price moves below the strike price of the Put option.

Rewards Limited

The profit is limited to premium received in your account when you sell the Put Option.

Limited

The maximum profit on this strategy happens when the stock price is above the call price on expiry. The profit is the total of the gain from buying/selling stocks and net premium received on selling options.

Maximum Profit Scenario

Underlying doesn't go down and options remain exercised.

You will earn the maximum profit when the price of the stock is above the Call option strike price on expiry. You will be assigned on the Call option, would be able to sell holding shares on profit while retaining the premiums received while selling the options.

Maximum Loss Scenario

Underlying goes down and options remain exercised.

The maximum loss would be when the stock price falls drastically and turns worthless. The premiums received while selling the options will compensate for some of the loss.

Pros & Cons or Short Put and Covered Strangle

  Short Put Covered Strangle
Advantages

It allows you benefit from time decay. And earn income in a rising or range bound market scenario.

  • As the strategy involves buying shares when prices fall, there is long-term gain even if their short-term loss.
  • There is no upside risk due to the long position in stocks.
  • Allows you to earn income in a moderately bullish market.
Disadvantage

It is a high risk strategy and may cause huge losses if the price of the underlying falls steeply.

  • The substantial risk when the price moves downwards.
  • Risk of assignments.
Simillar Strategies

Bull Put Spread, Covered Call, Short Straddle

Long Strangle, Short Strangle







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