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Short Strangle (Sell Strangle) Vs Covered Strangle Options Trading Strategy Comparison

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

Short Strangle (Sell Strangle) Vs Covered Strangle

  Short Strangle (Sell Strangle) Covered Strangle
Short Strangle (Sell Strangle) Logo Covered Strangle Logo
About Strategy The Short Strangle (or Sell Strangle) is a neutral strategy wherein a Slightly OTM Call and a Slightly OTM Put Options are sold simultaneously of same underlying asset and expiry date. This strategy can be used when the trader expects that the underlying stock will experience a very little volatility in the near term. It is a limited profit and unlimited risk strategy. The maximum profit earn is the net premium received. The maximum loss is achieved when the underlying moves either significantly upwards or downwards at expiration. A net credit is taken to enter into this strategy. For this reason, the Short Strangles are Credit Spreads. The usual Short Strangle Strategy looks like as below for NIFTY current index value at 10400 (NIFTY S... Read More 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 Neutral Bullish
Strategy Level Advance Advance
Options Type Call + Put Call + Put + Underlying
Number of Positions 2 3
Risk Profile Unlimited Limited
Reward Profile Limited Limited
Breakeven Point two break-even points two break-even points

When and how to use Short Strangle (Sell Strangle) and Covered Strangle?

  Short Strangle (Sell Strangle) Covered Strangle
When to use?

The Short Strangle is perfect in a neutral market scenario when the underlying is expected to be less volatile.

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 Neutral

When you are expecting little volatility and movement in the price of the underlying.

Bullish

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

Action
  • Sell OTM Call
  • Sell OTM Put

Sell 1 out-of-the-money put and sell 1 out-of-the-money call which belongs to same underlying asset and has the same expiry date.

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 two break-even points

A strangle has two break-even points.

Lower Break-even = Strike Price of Put - Net Premium

Upper Break-even = Strike Price of Call+ Net 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 Strangle (Sell Strangle) Vs Covered Strangle)

  Short Strangle (Sell Strangle) Covered Strangle
Risks Unlimited

The maximum loss is unlimited in this strategy. You will incur losses when the price of the underlying moves significantly either upwards or downwards at expiration.

Loss = Price of Underlying - Strike Price of Short Call - Net Premium Received

Or

Loss = Strike Price of Short Put - Price of Underlying - Net Premium Received

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

For maximum profit, the price of the underlying on expiration date must trade between the strike prices of the options. The maximum profit is limited to the net premium received while selling the Options.

Maximum Profit = Net Premium Received

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

Both Option not 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

One Option 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 Strangle (Sell Strangle) and Covered Strangle

  Short Strangle (Sell Strangle) Covered Strangle
Advantages

The strategy offers higher chance of profitability in comparison to Short Straddle due to selling of OTM Options.

  • 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

Limited reward with high risk exposure.

  • The substantial risk when the price moves downwards.
  • Risk of assignments.
Simillar Strategies Short Straddle, Long Strangle Long Strangle, Short Strangle







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