Trading a short strangle strategy is a popular approach in options trading. The option strategies involve selling a call option and a put option at the same expiration date but with different strike prices. Short strangles are typically used by traders who are bullish or bearish on an underlying asset but expect the price to remain in a particular range. In this article, we will examine the ins and outs of trading a short strangle strategy.
Understanding the Basics
To trade a short strangle strategy, you need to have a basic understanding of options trading. You must be familiar with the mechanics of buying and selling call and put options, understand what strike price and expiration date mean, and have adequate knowledge of options pricing. If you’re new to options trading, it’s important to read up on the basics and consider taking a course on options trading that helps you understand option strategies.
Identifying the Right Underlying Asset
The first step in implementing a short strangle strategy using an options trading builder is to identify an underlying asset that you want to trade. The asset should have a history of stable price movement that is within your comfort level to manage risk. You will also need to select an expiration date that is long enough to allow for potential price movement, but not too far that the underlying asset becomes too volatile.
Identifying the Right Strike Prices
The next step is to select the right strike prices. This is often the most complicated part of implementing a short strangle strategy in options strategies, as it requires a bit of speculation and planning. The goal is to select strike prices that are far enough away from the current market price of the underlying asset to create a profit potential but not too far away that the short strangle becomes too risky. The call option’s strike price should be above the current price of the underlying asset, while the put option’s strike price should be below. Check more on options strategy builder.
Placing the Trade
Once you have identified the underlying asset, expiration date, and strike prices, you can place your short strangle trade. You will need to sell both the call and put options simultaneously. The profit in this strategy is limited, but losses can be unlimited. Therefore, it’s essential to set stops and implement risk management strategies to minimize any potential losses while opting for option strategies.
Monitoring the Trade
After placing the trade, you must monitor it closely. It’s important to understand that the short-strangle strategy has the potential to generate profits quickly, but it can also turn against you in a matter of days. You should continually assess the underlying asset’s movement, any changes in volatility, and potential risks that may affect your position. Be ready to close out your position or adjust your strike prices if necessary. Check more on options strategy builders.
Adjusting Your Strategy
In some cases, you may need to adjust your strategy to manage risk or maximize profits. One of these opinion strategies is to buy back one of the options while letting the other option remain open, especially when the price of the underlying asset has moved toward one of the strike prices. This minimizes losses if the underlying asset continues to move in an unfavorable direction.