Do you know even if the stock price doesn't move, you can still profit by trading options?
If you combine selling Put and Call options, you can define a range that the stock prices can move while still make a profit.
Today, SlashTraders will show you how to use the Options Scanner to find high probability and high profit Strangles options strategies, so you can trade neutral options strategies with confidence.
What Is the Strangle Options Strategy?
A Strangle options strategy works by selling a Put and a Call to define a range you can profit from. As long as the underlying price does not exceed or drop below the strike prices of Put and Call before expiration the two options contracts will depreciate and we profit as an options seller.
Let's recall the profit analyses of selling OTM Put and OTM Call options. We receive a premium when we sell the OTM Call. If the underlying price doesn't increase, the Call option value will depreciate and we earn a profit.
But if the stock price increases beyond the Call strike, the maximum loss is infinite.
We also receive a premium when we sell an OTM Put option. If the underlying price doesn't drop, the Put option value will depreciate and we earn a profit.
But if the stock price decreases below the Put strike, the maximum loss is infinite.
When we combine selling an OTM Call and an OTM Put we get a short Strangle strategy. The Put strike defines the lower boundary of the price movement, while the Call strike defines the upper boundary of the price movement.
If the underlying stock price doesn't move beyond the boundaries, the short Strangle will be profitable.
Is Short Strangle Risky?
A short Strangle is made up of a short naked Put and a short naked Call, similar to a short Straddle. So the risk of a Short Strangle is that it can have unlimited losses when the stock price rises or falls in a big way.
|Price direction||Maximum loss to a short Strangle|
|Bearish||Strike price x 100 - premium|
What Are the Key Points to Profitable Short Strangles?
When selling Strangles, we want both theta and vega to depreciate the options prices, so we can sell high price Strangles to open, and buy low price Strangles to close.
Theta is the changes to options value with respect to changes in time.
From our experience, selling options with more than 30 days to expiration have a consistent time value decay, and the gamma risk is lower. So we can be patient and earn a profit as time passes.
Vega is the changes to options value with respect to changes in IV.
Since we want to sell high and buy low, we need to sell to open at high IV, then buy to close when vega causes the option's value to decay at low IV.
We also need to find underlying opportunities with underrated volatilities. We can do that by picking stocks with price trends that rarely exceed Bollinger Bands, and also stocks with high market capitalisation to reduce the risk of manipulation.
If the Strangle is losing near expiration, we can consider rolling the Strangle to a later date to offset the losses with extra premium. Then we can patiently wait for our trade to become profitable.
Options Scanner Settings to Find the Best Short Strangle Opportunities
SlashTraders' Options Scanner is designed to find high probability and high return Strangles in seconds. Here are some tips to use the filtering function to find the best short Strangle entry points.
- We want to choose opportunities with longer than 30 DTE to get the safest theta decay.
- IV Perc is the relative position of current IV compared to the range of IVs in all the trading days in the previous year. We can filter IV Perc >67% to find stocks with IV higher than 2/3 of trading days in the past year. So they have a high chance of contracting IV and vega in our favour.
- Open Interest is the number of the total number of outstanding derivative contracts for the underlying. We can find stocks with Open Interests >100,000 to make sure the liquidity is good, so we get our trades filled easily.
- By choosing Market Cap ($B) larger than 10 billion, we avoid choosing stocks that can get manipulated and explode like GME.
- A good idea is to eliminate stocks with depressed price movement, because IV will expand soon after. So we need to choose Squeeze status as False.
- To further reduce risks, we can limit the Strangle BP to less than $1000, so we can easily diversify our portfolio.
Finally, we can sort the Strangles ROC by descending order to get a shortlist of the highest return Strangles.
The Best Short Strangle Options Right Now
You can see the Fair Value and Earnings Date for every underlying to help us fine-tune the selection and get the best entry points.
If the Fair Value is very close to the strikes listed in the Strangle Details, we can be even more confident that the Strangles will be profitable.
Earnings Date is an event that can cause large price movements, so we want to avoid selling neutral options strategy past Earnings Date.
We can see the top 3 stocks with highest return have upcoming Earnings, so selling Strangles for them are quite risky.
Instead, we can look at selling Strangles to SNAP. Even though the Fair Value is outside of the 0.20 delta strikes, we believe it has similar characteristics to a strong social media platform like Facebook, so it may be relatively stable.
If we sell to open a Strangle for SNAP that expires in 40 days, it has a 27% maximum return if SNAP stock price does not exceed the Put and Call strike prices before options expiration.
Now you know how to use the Options Scanner to filter high probability and high return Strangles options. Remember to use the scanner often to find the best neutral trades sell, and profit from the lack of price movement.
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