Short strangle
Also written Sell strangle · Short strangle strategy
Selling an out-of-the-money call and an out-of-the-money put on the same underlying and expiry. It profits if the price stays between the two strikes; losses are unlimited on a large move.
In plain language
A short strangle is the short straddle's wider cousin.
The trader again sells a call and a put and hopes the price stays calm. But instead of selling both at the same strike, the trader sells a call above the current price and a put below it. Both are out-of-the-money.
That gives the underlying more room to wander before the trader loses money. The cost of that room is a smaller premium, because out-of-the-money options are cheaper. And the danger is the same as with a straddle: a big move either way produces losses with no limit.
How it works
Construction (Chapter 17): a short strangle "involves a short position in two out-of-the-money options (call and put)". It is exactly the opposite of a long strangle. The outlook, as for the short straddle, is that the underlying price will remain stable over the life of the options.
How it differs from a straddle: the outlook is similar, but "the implementation, aggression and cost are different". A straddle uses one strike; a strangle uses different strikes, both OTM.
The workbook's numbers: stock at 6,100; 6,200 call at Rs 145; 6,000 put at Rs 140.
- Maximum profit = 145 + 140 = Rs 285, earned anywhere between 6,000 and 6,200 at expiry.
- Break-evens = lower strike − total premium = 6,000 − 285 = 5,715; higher strike + total premium = 6,200 + 285 = 6,485.
- Maximum loss: unlimited in both directions.
Chapter 22 repeats the strategy on a government security: bond at Rs 99, 99.25 call at 0.20 and 98.75 put at 0.15, so a maximum of Rs 0.35 between 98.75 and 99.25, with break-evens at 98.40 and 99.60.
The formula
Premium collected = Call premium + Put premium
Maximum profit = Premium collected (for Xput ≤ S ≤ Xcall)
Lower break-even = Xput − Premium collected
Upper break-even = Xcall + Premium collected
Maximum loss = unlimited
A worked example
The workbook's Chapter 17 short strangle: sell the 6,200 call at 145 and the 6,000 put at 140. Premium collected 285.
| Stock at expiry | Short call | Short put | Net |
|---|---|---|---|
| 5,500 | +145 | 140 − 500 = −360 | −215 |
| 5,800 | +145 | 140 − 200 = −60 | +85 |
| 6,000 to 6,200 | +145 | +140 | +285 |
| 6,400 | 145 − 200 = −55 | +140 | +85 |
| 6,700 | 145 − 500 = −355 | +140 | −215 |
Straddle versus strangle on the same stock. The short straddle in the same chapter collected 393 with break-evens 5,607 and 6,393, a profit band 786 wide. The short strangle collects less, 285, but its band from 5,715 to 6,485 is 770 wide and its full profit holds across a 200-point range instead of at a single price.
Illustrative scaling with an assumed lot of 100 shares: best case Rs 28,500; a close at 6,700 loses 215 × 100 = Rs 21,500.
Why NISM asks about it
Chapter 17 (Strategies using Equity Futures and Equity Options) covers the long and short strangle with pay-off tables; Chapter 22 (Strategies using Interest Rate Derivatives) applies it to a GOI security. Expect break-even and maximum-profit calculations, and questions that test straddle versus strangle: same strike versus different OTM strikes.
Common exam traps
- Both legs are out-of-the-money. If both legs share one strike, it is a straddle.
- Maximum profit holds over a range (between the two strikes), not at one price.
- Break-evens use the outer strikes: put strike − total premium, call strike + total premium.
- Unlimited loss in both directions; a short strangle is not a hedged position.
- Lower premium than a short straddle, because OTM options are cheaper.
- Short strangle wants calm; long strangle wants a big move. Identify the side before the view.
Where this is taught
Free preparation for NISM Series IVRelated terms
- Break-even pointThe level of the underlying at which a position makes neither profit nor loss — for a bought call, strike plus premium; for a bought put, strike minus premium.
- Long strangleBuying an out-of-the-money call and an out-of-the-money put with the same expiry but different strikes — the cheaper cousin of the straddle, with a wider band of loss between two break-even points.
- Option writerThe party who sells an option: receives the premium upfront and takes on the obligation to sell (call) or buy (put) the underlying if the buyer exercises. Gain is capped at the premium.
- Short straddleSelling a call and a put with the same strike and same expiry, betting the underlying stays still. Profit is capped at the two premiums; losses grow without limit on a big move either way.
- Out-of-the-moneyAn option that would produce a negative cash flow if exercised immediately — a call with the spot below the strike, or a put with the spot above it. Its intrinsic value is zero and its premium is all time value.
- Long straddleBuying a call and a put at the same strike and the same expiry — a bet that the underlying moves a long way in either direction, with two break-even points and a maximum loss equal to both premiums.