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  • Neutral strategy. High probability strategy. Sell one out of money call, sell one out of money put
  • If you sell call and put with 0.16 delta i.e. one standard deviation away from current stock price, the trade has 70% probability of being profitable.
  • Break even = put strike - premium received, call strike + premium received

Defending the trade:

  • Depending on risk tolerance, make adjustments to the trade either when:
    • stock price breaches the option strike price
    • OR when price breaches the break even price
  • Roll up: If the stock moves higher, buy back the current put and sell higher strike put. More premium will move break even higher, giving stock more room to rise
  • Roll down: Same idea as above. If the stock moves lower, move the call down to get more credit
  • Goal is to keep collecting premium so that stock remains within the break even point even if it has gone past the short option strike.

Inverted Strange:

  • If you keep moving the put up or the call down, at some point the strangle will go “inverted” i.e. put strike is now higher than call strike.
  • This is ok, as long as we make sure that the total premium we collected is more than the difference between the two strike prices. For example:
    • say we start with 25 put and 75 call when the stock is at 50
    • stock keeps rising and we move the put all the way up to 75. So now we have a 75 call and put (btw this is called a Straddle)
    • say upto this point we have collected $8 premium, that means if the stock stays below 83(75+8), we are fine
    • if the stock moves to 84, it is now outside of our break even point. We need to collect more premium
    • let’s say moving the put to 84 will give us an extra $2, making total premium $10 and moving our break even to 85
    • From here, if the stock stays between 84-85, we profit at expiration because put will be worthless and we will have to buy back the call but it will be less than $10 (85-75)
    • If the stock goes between 75-84, now both our call and put will be in the money. This is important If the stock remain between this range, we will pay (84 - 75 = 9) at expiration to close our position. This is why it is important that we collect more premium than inverted strangle width.
    • If you can not collect enough premium, you can look to roll out your options i.e. sell farther dated options. It is good to roll out when the IV is high because that’ll let you collect more premium
    • Sometimes when rolling out, you’d want to consider un-inverting the strangle or moving up/down the in the money side to bring the current stock price close to the center of your break evens.

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