Key Takeaways with Craig

According to CME Group Data, “Strangles” are one of the most popular options strategies among individual traders in CME’s options markets.  At execution, a speculative strangle position is relatively neutral in terms of the direction of the price movement of the underlying future and provides the trader with exposure to changes in implied volatility.  

A short strangle position involves selling both an out of the money Call and a Put.  In this case, the position, at expiration, will realize max profitability if the price of the underlying remains between the two strike prices and the trader keeps 100% of the premium collected.  If the underlying price moves higher than the Call strike or lower than the Put price by more than the premium collected, at expiration, the position will be unprofitable.  Because the seller of the option is exposed to unlimited moves in either direction, the amount of the potential loss is also unlimited. 

A long strangle involves buying the out of the money Call and Put.  The Profit and Loss characteristics are reversed in this case, and, because this position is long both options, the potential loss is limited to the premium paid for the two options.  

Generally speaking, a speculative long strangle assumes the underlying price will move more than the options market is pricing (implied volatility) and a short position assumes the underlying will move less than the options market is implying.  

Of course, as with all options trading, changes in several different elements like volatility, underlying futures price, time to expiration etc, will impact the value of the option position between initiation and expiration.  


Let’s look at a real-life, short strangle example using WTI Crude Oil options:

Using markets from 6/14 @ 1:55PM CST, we selected the following options:

Futures: 78.16

Sell 1 79.5 Call | Premium 1.44 | IV: 21.58% | Delta: -.41 | Gamma: -.0765 | Vega: -9.1155 | Theta: -.0298

Sell 1 76.5 Put | Premium 1.38 | IV: 22.7% | Delta: .36 | Gamma: -.0702 | Vega: -8.8069 | Theta: -.0302

Position: Delta: -.05 | Gamma: -.0001 | Vega: -37 | Theta: .12

Max profit and loss (excluding all fees and commissions):

  • The max profit that this position could realize is the credit taken in at execution
    • 1.44+1.38  = 2.82 pts (2.82*$1,000 = $2,820)
  • The max loss that this position could realize, as stated earlier, is unlimited.  
  • The P&L graph of each option and the overall P&L is shown in the three graphs on the left side of the image below:

Short 79.5 Call

  • 1.44 ($1,440) points were collected at the initiation of the trade.  At any price at, or below, 79.5, this position will expire worthless and the trader will keep the premium collected. 
  • As the price rises above 79.5, the option gains value incrementally and, because the position is short, will have a negative impact on the P&L.

Short 76.5 Put

  • 1.38 points ($1,380) was collected at the initiation of the trade. Similar to the short Call, at any price at or above 76.5, this option will expire worthless and the trader will retain the premium collected.  However, as the price moves below 76.5, the position will begin to lose money incrementally.  

Overall Position P&L

The overall position graph is simply an addition of the Call and Put P&L charts. 

P&L Scenarios Prior to Expiration

These graphs show the theoretical P&L of the position at expiration.  However, as we mentioned earlier, because option pricing is multi-dimensional, factors like volatility and time can impact the value of the position between execution and expiration. Although it is impossible to illustrate all the different values at which this option could theoretically trade because of the dynamic nature of options pricing, we wanted to illustrate some “what-if” scenarios to demonstrate how things like implied volatility and time decay might impact the position. These are described in the right side image below.  

Traders Resources

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