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neutral strategies
Short Strangles
Analyzing the risk profile of a short strangle
Variation In Strike Price
Let's take a look at how selection affects this strategy. In the examples below we are selling strikes equidistant from the current share price, creating delta-neutral strangles. Pay close attention to the width of the strikes. Notice how the wider the strikes are, the lower the maximum profit, but the better the break evens. Narrower strikes collect bigger credits but have a smaller window for profitability.
Narrow Width (40Δ Strikes):
Below, we have narrow strikes but a large $2.00 maximum profit potential. There is only a $2-wide window to achieve this maximum profit, but a $4-wide range for break-even or better.
Moderate Width (30Δ Strikes):
In this case, we have moderately spaced strikes and a smaller $1.40 maximum profit potential. There is a $4-wide window to achieve this maximum profit, and a $6.80-wide range for break-even or better. Our odds of profit would be higher than they were with the narrow strikes.
Wide Width (10Δ Strikes):
Finally, we have extremely wide strikes and a tiny max profit potential of $0.30. There is a huge $8-wide window to achieve maximum profit, and a $8.60-wide range for break-even or better. Our odds of profit are extremely high in this scenario, however we there isn't much that can be made.
Finding a Balance
It's easy to be lured by high profit potential, but then our odds may suffer and we may experience loss more frequently. Likewise, it is just as easy to be lured by a trade with a of 80% or greater, however, the payout may not be worth the risk or the effort. When we sell strangles, our challenge is to find the right balance of worthwhile profit potential and favorable odds.