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Covered Strangle Option Trading Strategy Explained

Published on Thursday, August 9, 2018 | Modified on Sunday, December 27, 2020

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.

When to use Covered Strangle strategy?

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.

Example

Suppose shares of ABC company is currently trading at Rs 200. You buy 100 shares of the company or are already holding it. You sell an OTM Call at the strike price of Rs 210 at a premium of Rs 10 per share and OTM Put at the strike price of Rs 190 at Rs 8 per share. The lot size is 50 shares.

Market View - Bullish

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

Actions

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

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.

How to exit?

1. On expiry, retain the premiums and buy the shares in case the stock closes below Put strike prices.
2. On expiry, retain the premiums, get the assignment of shares, sell the holding shares in case the stock closes above Put strike prices.

Simillar Strategies

Long Strangle, Short Strangle

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