Short Strangle trading strategy consists of one call and one put option positions at the same time. Here the trader sells one put option at the lower strike price (XL) and sells one call option at a higher strike price (XH). Call option premium C will be same as put option premium P.
XL = USD 100; XH = USD 120 C = USD 10; P = USD 10
Current Share Price, S0 = USD 80
Total Premium Received = USD (10 + 10) = USD 20
Maximum Loss will be unlimited as the market moves in any direction. The loss payout can be easily understood from the below payout diagram.
Maximum profit will be limited to the total premium received from selling both the options when both of them are expired. The maximum profit will be equal to the total premium received which is USD 20.
Breakeven price is the share price where the profit stood at 0 and it separates profit from loss. There will be two breakeven prices here, one is USD 140 and another is 80 USD. At these prices, the profit from total premium received will be compensated by the loss of one option. The breakeven price can easily be determined from the table and the chart.
The following table shows the profit/loss scenarios for different share prices.
The below chart shows the profit/loss for the trading strategy option with the movement of the share price.
Here we have three graphs
Long Straddle trading strategy is used when the trader is bearish on volatility and think market prices will remain stable. A short strangle is similar to the Short Straddle except the strike prices are further apart, which lowers the premium received but also increases the chance of a profitable trade.