Investment Type: Debit
Strike Prices: OTM for Put sold leg and have to be lower than Call sold leg
Expiration Month: current month for both sold legs
Composition: Buy Stock + Sell put + Sell call
| Covered Short Strangle Profile Chart | ||
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Covered Short Strangle is a less risky, less aggresive than Covered Short Straddle as the strategy uses OTM put for its sold leg. This strategy gives better yield and breakeven point than Covered Call, however we need to identify strong support line and the breakeven point has to be higher than the support line. Because our loss will get magnified once the stock price falls below breakeven point.
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Entry:
Investment @ Entry = (Stock Price x 100 Shares) + (Premium of Call Sold Leg x No of Contracts x 100) + (Premium of Put Sold Leg x No of Contracts x 100) = $3,400 + ($80) + ($60) = $3,260
Breakeven Point = Stock Price – (total premium received on the Sold Legs) = $34.00 – ($0.60 + $0.80) = $34.00 - $1.40 = $32.60
Exit:
Best Case Scenario:
Profit @ Exit = (Stock Price x 100 Shares) + (Premium of Call Sold Leg x No of Contracts x 100) + (Premium of Put Sold Leg x No of Contracts x 100) – Investment @ Entry = $3,500 + $0 + $0 - $3,260 = $240
Return of Investment = Profit @ Exit / Investment @ Entry = 7%
Worst Case Scenario : Unlimited
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