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Bullish Patterns
Long Calls
Bull Call Spread
Bull Put Spread
Call Backspread
Long Call Ratio Spread
Naked Put
Synthetic Long Stock
The Collar
Covered Calls
Synthetic Long Call
Synthetic Short Put
Covered Straddle
Covered Strangle
Married Put
Protective Put

Bearish Patterns
Long Puts
Bear Put Spread
Bear Call Spread
Put Backspread
Long Put Ratio Spread
Naked Calls
Synthetic Short Stock
Synthetic Short Stock (split strikes)
Covered Put
Protective Call
Synthetic Short Call
Synthetic Long Put

Long Volatility
Long Straddle
Long Strangle
Short Call Butterfly
Short Put Butterfly
Short Iron Butterfly
Short Call Condor
Short Put Condor
Short Iron Condor
Long Guts
Strip
Strap
Short Call Ladder
Short Put Ladder
Long Call Synthetic Straddle
Long Put Synthetic Straddle

Short Volatility
Short Straddle
Short Strangle
Long Call Butterfly
Long Put Butterfly
Long Iron Butterfly
Long Call Condor
Long Put Condor
Long Iron Condor
Short Guts
Long Call Ladder
Long Put Ladder
Call Ratio Spread
Short Call Ratio Spread
Put Ratio Spread
Short Put Ratio Spread
Ratio Call Write
Ratio Put Write
Short Call Synthetic Straddle
Short Put Synthetic Straddle
Variable Ratio Write

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Short Strangle

Risk: high
Reward: limited

General Description
Entering a short strangle entails selling lower strike puts and an equal number of higher strike calls (same expiration month). It's similar to a short straddle except the strikes are staggered instead of the same.

(draw a short strangle risk diagram here)

The Thinking
You're confident a stock will trade in a tight range and not move much from its current position. To profit you sell both calls and puts - both of which decline in value when the underlying trades sideways (time decay). If you're correct, if the underlying stays relatively close to home, the calls and puts will declined in value, and you'll be able to buy them back at a lower price or let them expire worthless.

Example

XYZ is at $55.00. The stock has just dropped quickly from $65.00 and is due for a rest. Also, because of the quick drop, volatility has spiked, so options are temporarily expensive. To profit from either some sideways grind or a crash in volatility, you employ a short strangle. You sell (1) 50 put for $2.00 and (1) 60 call for $2.00. The net credit is $4.00.

If volatility crashes, you could possibly buy the options back within a couple days for a decent profit even if the stock doesn’t move.

Absent a volatility crash, as long as the underlying closes between 50 and 60 on expiration, the calls and puts expire worthless, and you keep the net credit received when the trade was initiated.

But if the stock rallies hard or collapses, you could be in trouble because you have a naked call and naked put. If the stock rallied to $70, the put would expire worthless ($2.00 profit), and the call would be worth $10 ($8.00 loss). The net is a $6.00 loss. Not too bad considering how much the stock moved. If the stock dropped to $40, the call would expire worthless ($2.00 profit), and the put would be worth $10 ($8.00 loss). The net is a $6.00 loss. Again, not too bad considering how much the stock moved.

The PL chart below graphically shows where this trade will be profitable and at a loss.