Short Strangle

 

Components

Short one OTM Call
Short one OTM Put

Short one put option with a lower strike price and short one call option at a higher strike price.

Risk / Reward

Maximum Loss: Unlimited as the market moves in either direction.

Maximum Gain: Limited to the net premium received for selling the options.

Characteristics

When to use: When you are 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.