Selling a call and selling a put with the same expiration, but where the call strike price is above the put strike price is known as the short strangle strategy. The short strangle option strategy is a limited profit options trading strategy that is taken when the options trader thinks that the underlying stock will experience little volatility till expiry.
Like the short straddle, advanced traders might run this strategy to take advantage of a possible decrease in implied volatility. If implied volatility is abnormally high for no apparent reason, the call and put may be overvalued. After the sale, the idea is to wait for volatility to drop and close the position at a profit.
Maximum profit for the short strangle occurs when the underlying stock price on expiration date is trading between the strike prices of the options sold. At this price, both options expire worthless and the options trader gets to keep the entire initial credit taken as profit.
The formula for calculating maximum profit is given below:
Large losses for the short strangle can be experienced when the underlying stock price makes a strong move either upwards or downwards at expiration.
The formula for calculating loss is given below: