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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ABOUT THE AUTHOR

Eric Wilkinson

Author:  Eric Wilkinson
Company:  Pro Trader Strategies
Website:  https://www.protraderstrategies.com
Services Offered:  Trading Schools and Trading Strategies
Markets Covered:  Futures, Stocks, Forex and Options

Eric "The Wolfman" Wilkinson is a veteran floor trader and has been trading financial futures, commodities, stocks, stock indices and options on a variety of products for over 20 years. He has been sought out by several media outlets to debate against some of the brightest minds in the industry, where he debates on topics ranging from economics, geopolitics and market directions.