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neutral strategies
Short Strangles
Analyzing the risk profile of a short strangle
Skewing Strikes
In the examples below we see how skewing the strikes – selling a larger delta strike against a smaller delta strike – creates directional bias in the strangle. Selling a larger-delta put creates a more bullish strategy. Likewise, selling a larger-delta call would create a more bearish strategy.
Bullish Strangle (+40Δ Put/-20Δ Call)
In this example we sold a +40Δ put against a -20Δ call. The result is a bullish-skewed strangle with a net delta of +20:
Bearish Strangle (+20Δ Put/-40Δ Call)
In this example we sold a +20Δ put and a -40Δ call. The result is a bearish-skewed strangle with a net delta of -20:
Selling an Strike
Now, let's take a look at what happens if one of the strikes is sold in the money. We collect a large credit because, in this case, we are also selling a bit of intrinsic value. The only way to keep that intrinsic value, however, is by being – it will not decay over time like extrinsic value does. The resulting strategy is a highly directional bet, less favorable break-evens, and a higher profit potential.
Bullish Strangle (+60Δ Put/-20Δ Call)
In this example we sold a +60Δ put (100Δ - 40Δ, because the option is ITM) and a -20Δ call. The result is a very bullish strangle with a net delta of +40, a high profit potential, and a lower probability of success:
Bearish Strangle (+20Δ Put/-60Δ Call)
For this last example, we sold a +20Δ put and a -60Δ call. The result is a very bearish strangle with a net delta of -40, a high profit potential, and a lower probability of success:
