Asset 7
Asset 7

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SELL STRANGLE

The underlying stock is lacking direction and likely to continue to lack direction over the next several weeks. With decent IV rank, it’s a great opportunity to trade around a defined range and “strangle” a range of prices.

Enter a Strangle (Sell 1 call at one strike price while simultaneously selling a single put at 1 other strike price.). To construct this position:

  • Current Stock Price: $X/share
  • SELL TO OPEN 1 CALL OPTION at the projected range price
  • SELL TO OPEN 1 PUT OPTION at the projected range price
  • >> The resulting order contains 2 option contracts in total and is entered as a “credit” 

The max projected loss for this investment is unlimited.  That is because left unmanaged, a strangle could result in unlimited losses!  This is why we seek to sell strangles when we have high confidence that the underlying stock will not move beyond the “break-even” range. 

The underlying stock should continue to trade inside the projected range over the next couple weeks causing the credit available to shrink and taking the investment into profit. An investor can close the trade for profit when the available credit is less than the initial credit sold or collected.

The underlying stock should not trade outside the break-even range.  If it does, then an investor closes the position for a small loss.

SELL STRANGLE - Miiflo