Using the Short Strangle to Trade Options

Increasing your returns is really as simple as knowing when, where and how to implement options strategies to increase the probabilities of success. One of the ways to achieve higher returns is to diversify our portfolios. When a trader is struggling with what the direction of the market is going to go or is under the assumption that the market is going to trend sideways for the next few weeks, it may be the time to put on a Short Strangle.

Eric "The Wolfman" Wilkinson, former Chicago Board of Trade floor trader and 25 year professional trader, explains how traders of short Strangles can be profitable without a market assumption or in a sideways market. Eric shows the correct way to trade a short Strangle to increase their probabilities of success and be profitable in a non-directional market.

The Short Strangle

Directional Assumption = Neutral

The Short Strangle is an option strategy that takes advantage of a correct neutral market assumption and exploits (when implemented properly) Theta and Vega. The correct environment surrounding the underlying is imperative and should be implemented with less than 45 DTE and an Implied Volatility Percent of greater than 50%. Increasing volatility will negatively affect this strategy while a decrease in volatility will positively affect this strategy. Theta (time) decay will positively affect this strategy.

Setup:  Simultaneously sell a one standard deviation (16ish Delta) Call and Put

• Max Profit - Credit received
• Max Loss - Infinite
• Breakeven - Call strike price + Credit received

OR

• Put strike price – Credit received

**Max Profit, Max Loss and Breakeven calculations are based on the relationship between the underlying’s in relation to the options strikes at expiration

THE MOVIE: USING THE SHORT STRANGLE TO TRADE OPTIONS

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Here's what you'll learn

• Set up your Options Screen like "The Wolfman"
• How to use Delta to measure your odds of a winning trade
• How to measure and use Time Decay in your favor
• Using Market Profile to trade Options
• and much, much more

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