A Short Strangle is a slight modification to the Short Straddle. It tries to improve the profitability of the trade for the Seller of the options by widening the breakeven points so that a greater movement is required in the underlying stock/index, for the Call and Put option to be worth exercising.
This strategy involves the simultaneous selling of a slightly out-of-the-money (OTM) Call and a slightly out-of-the-money (OTM) Put off the same underlying stock/index and expiration date.
[OTM Put - When the put option's strike price is lower than the prevailing market price of the underlying stock.
OTM Call - When the call option's strike price is higher than the prevailing market price of the underlying stock.]
This typically means that since OTM Call and Put are sold, the net credit received by the seller is less as compared to a Short Straddle, but the break-even points are also widened. The underlying stock has to move significantly for the Call and the Put to be worth exercising. If the underlying stock does not show much of a movement, the seller of the Strangle gets to keep the premium.
When to Use: This options trading strategy is taken when the options investor thinks that the underlying stock will experience little volatility in the near term.
Reward: Limited to the premium received
Upper Breakeven Point = Strike Price of Short Call + Net Premium Received
Lower Breakeven Point = Strike Price of Short Put - Net Premium Received