Covered Short Strangle

A risky income tactic that involves selling an out-of-the-money put to generate extra income while increasing the yield of a covered call. It is comparable to a covered straddle but poses less risk.

Description:

A covered short strangle is a complex options strategy that involves simultaneously selling a call option and a put option on the same underlying security with different strike prices and the same expiration date, while also holding a long position in the underlying security. The strategy is designed to profit from a lack of significant price movement in either direction and is typically used in a neutral market outlook.

The trader profits from the strategy if the price of the underlying security remains close to the strike prices at expiration. If the price of the security moves significantly away from the strike prices in either direction before expiration, one of the options will be exercised and the trader will suffer a loss. However, the long position in the underlying security helps to offset the loss. The maximum profit is limited and is equal to the net credit received to enter the position. The maximum loss is limited and is equal to the difference between the price of the underlying security and the strike price of the options at expiration.