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Short Strangles
Analyzing the risk profile of a short strangle
What Happens At Expiration?
If the Share Price Breaches the Put
If the share price lands below the put at expiration, the put will have taken on intrinsic value. As long as that intrinsic value is not greater than the credit received for placing the trade, the position will still be profitable as shown in the first example below. If the share price has fallen so low that the put's intrinsic value is greater than the credit received, the position will be a loser as shown in the second example. Also, regardless of whether or not the position is profitable, because the short put is it will be 100 long shares at the strike price. The next trading day, you would see 100 long shares in your portfolio. The short call, on the other hand, is and would expire completely worthless. It would disappear completely.
If the Share Price Breaches the Call
On the other side of the field, if the share price lands above the call at expiration the call will have taken on intrinsic value. Just like the put scenario, as long as the intrinsic value is not greater than the total credit received, the position will be profitable. If the share price rallies so much that the call does take on greater intrinsic value than the credit, the position will be a loser. Regardless of the position's profitability, if the call expires ITM, it will be assigned 100 short shares per contract, at the strike price. If you already owned shares, they would be sold. If you did not already own enough shares to cover the assignment, you would find short shares in your portfolio the next business day. The short put would expire worthless, and disappear from your portfolio entirely.
If the Share Price Lands Between The Strikes
If the share price lands between the strikes at expiration, both options would be OTM and expire worthless. The share price could be slightly lower, higher, or right in the center – its positioning is irrelevant as long as it is between the strikes. There would be no assignments and the risk of the position would be eliminated from your portfolio by the next business day. The trade will be a maximum winner, and you would get to keep the entire credit you received as profit.
