Selling Strangles

The exact opposite of buying strangles! In this case, the investor sells an OTM call and OTM put. Let's take a look at the graph:

As mentioned earlier, in the selling straddle post, when we sell a put we profit when the price is above the break even price (strike-premium sold) and when we sell a call we profit when the price is below the break even price (strike-premium sold). The profits and losses for selling a strangle are as follows:

Price is above the put break even price and below the call break price: Profit! Maximized at premium collected from both sales

When the price is not in the aforementioned range: Loss is unlimited

Advanced Tips: 

• Sell a strangles only when the IV is high and profit by buying it back when the IV collapses.  Environments around binary events such as major news announcements or earnings release are ideal for selling strangles
• Selling 16 delta call and 16 delta put gives approximately one standard deviation chances of profiting (i.e, 84% chance of winning)
• Close strangles at 50% profit helps long term profitablity of the portfolio. Example, if you sell a strangle for $2.00, you ought to take profits when you can buy the strangle back for $1.00 and deploy the capital for some other trade
• Closing strangles at 200% loss helps limit the deep drawdowns in your portfolio. Example, if you sell strangle for $2.00, you ought to close it if you can for $6.00 and move on to next trade. If you can't, you can roll the tested side to next cycle and move the non-tested side close to current stock price