Short Strangles | Options Crash Course: Strategy Management

[Music] so welcome back to the options crash course strategy series my name is jim schultz i'm glad that you are here with me today this is a very exciting moment because we are going to dive into the undefined risk category we're going to do so head first with the short strangle we're going to follow the same protocols as what we've done with all the other videos up to this point we're going to talk about managing winners we're talking about managing losers and we're going to talk about everything in between so let's do it and let's begin with the structure of a short strangle the short strangle is one of the simplest undefined risk strategies that you could select it consists of two legs an out of the money short call above the current stock price and an out of the money short put below the current stock price that's it now on entry there are a few things that you want to look out for number one since this is a short premium strategy it is best suited for a high ivr environment now ideally this would mean an ivr that's greater than 50. but at times an ivr that's maybe 25 or 30 might be high enough there is definitely some flexibility here number two and specifically two strangles we want to make sure that we collect enough on entry we typically set our minimum bound around one dollar across both the put and the call and the reason why is very simple this is an undefined risk strategy so we want to make sure that we are fairly compensated for taking all of that risk number three also specific to a strangle a great starting point for your strike selection would be somewhere around the 16 delta mark a 16 delta short call a 16 delta short put this is a classic one standard deviation strangle use this as a reference point to determine where you want to select your strikes you may want to collect more premium you may want to increase or decrease your probabilities that's perfectly fine but starting with the one standard deviation strangle is a really great foundation all right so now we know how these guys set up let's get to the fun stuff managing those winners this is going to be pretty simple this is going to be the same procedure that we have followed with our other short premium strategies short verticals and iron condors we take these guys off at 50 percent of max profit so for example if you sell a strangle for two dollars you're looking to buy it back for one dollar you sell a strangle for a dollar fifty you're looking to buy it back for 75 cents it really is that simple the one thing that you want to make sure that you do here though is don't take the legs off separately don't lag out of the trade our research has shown there's no long-term benefit to doing this so keep it very simple on as a package off as a package all right what about these not so fun guys what about these losers well i hope you have your powerade zero handy because you're gonna need those electrolytes this is gonna be a lot first up if the stock is between your short strikes don't do anything if the stock is between your short strikes even if it's moving around a lot the strategy is working let it work it isn't until one of the short strikes gets hit that the adjustment pro recall to follow is triggered alright so what happens when the stock rallies and your short call gets hit the stock falls and your short put gets hit it's basically a three step process with a fourth bonus step that you can execute at your discretion so let's get into it all right step one you roll the untested side into a tighter strangle where your objective is to reduce the magnitude of your deltas by 30 to 50 percent so for example let's say you put on that one standard deviation strangle to begin with so you're pretty delta neutral on trade entry let's say the stock rallies up to your short strike or maybe through you're a short strike now your position deltas might be around minus 50 deltas what you would want to do is roll that short put up until you have trimmed the magnitude of those bearish deltas by 30 to 50 percent so if you're at minus 50 maybe you're looking to reduce your deltas to minus 25 or minus 35 somewhere around that 30 to 50 percent magnitudinal reduction the same would be true if the stock fell you would roll your call strike down to again reduce the magnitude of your bullish deltas in this case by 30 to 50 percent all right so what if the stock still continues to move against you this is where you go to step two you roll that on pesticide into a straddle now so if the stock is continuing to rally you're gonna roll that short put strike all the way up until it shares the same strike as your short call strike if the stock is falling then you would roll the short call strike down all the way to share the same strike as the short put strike all right but what if that's still not enough what if the stock continues to get away from you the stock continues to move against you you go to step three you're going to want to go inverted with your strangle this means you roll your put strike up above your call strike if the stock is rallying or you roll your call strike down below your put strike if the stock is falling doing this will really help to control and mitigate your directional exposure on the position now naturally if i was in your position right now the number one question that i would have is alright jim how do i know where to set my inverted strike well to be honest there is a lot of discretion that you're going to need to apply there's plenty of pros and cons plenty of gimmies and gotchas that you need to consider but here is a great reference point consider moving your inverted strike to the new at the money strike the reason why this is a great reference point a great anchor in the sea if you will is the at the money strike always has the greatest amount of extrinsic value so if you move to that strike you can be assured that you are maximizing the extrinsic value that you are collecting on the trade what you really want to be aware of here is the width of the inversion relative to the credits that you have collected because your best case scenario now is the stock stays between your two short strikes and the two options are in the money so you can buy back that strangle for the width of the inversion so for example if you have a five dollar wide inverted strangle and you've collected seven dollars if the stock were to expire inside of those two short strikes both options would be in the money the total intrinsic value would be the width of the inversion for five dollars you collected seven dollars so you would end up netting a positive two dollar profit on the trade so you always want to be aware of this relationship because things are a little bit different now from what they were with a regular strangle all right now that fourth step that i promised you the bonus step you can always roll out in time you can always add duration to the trade and you can do this whenever you see fit you can combine it with step one you can combine it with step two you can combine it with step three so how do you know when is the best time to pull the trigger on this bonus step well remember we typically like to keep our short premium trades around 45 days to go so if there's still around 45 days to go in the current cycle like 47 or 43 or 40 or 39 then i would consider sitting tight but if you've gotten to a point where there aren't close to 45 days to go maybe you're at 21 maybe you're at 25 maybe you're at 30 this might be a really good time to roll this position out add that duration and use this bonus step now a quick disclaimer that entire protocol is a great guide to follow and the reasons why are these all along the way at every step in the process you are collecting credits you are reducing risk you are widening your breakeven points but is this the only way that you could adjust a short strangle absolutely not are there other viable successful ways to adjust a short strangle absolutely but if you are brand new if you are just gaining experience and you are just getting your feet wet then start here as you get some more exposure to the markets as you gain that experience by all means man tweak it tinker it and make it your own all right lastly what about that dance floor what about those trades that aren't really winners they're not really losers they're just kind of hanging out somewhere in the middle well this is pretty simple and it's going to be very similar to what we've done with our other short premium trades the short vertical the iron condor look at ivr if ivr is still high if it's still elevated then consider keeping it on but if ivr has come down if ivr has collapsed then consider taking it off alright guys man you made it that was a lot by all means save this video for future reference you might need to watch it a time or two or ten before it finally sinks in and share it with a friend man share with one of your trader friends that is learning about undefined risk strategies that is interested in short strangles that would be really really terrific and when you are ready i will see you in the next video the short put we'll see you there

Channel: tastytrade

Views: 21,940

Rating: 4.9690948 out of 5

Keywords: trade management, defending trades, winning trades, losing trades, profit/loss, rolling trades, bearish, bullish, options, trading, finance, market, volatility expansion, short strangle, undefined-risk strategies, positive theta, defending naked calls, defending naked puts, neutral trades, Dr. Jim Schultz, tastytrade, trade adjustments, naked options

Id: bRnh1phWaDk

Length: 10min 13sec (613 seconds)

Published: Sat Feb 20 2021