3 New Short Strangle Option Strategy Examples

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Strangle: In tonight's video, I want to go over the three new short strangle strategies that we enter today on Tuesday, December 8. Now, this is going to be a cool video because these three strangles that we entered into these three securities are very, very similar. They are almost the identical type of trade.

We set them up almost the identical way, and how we went about it. It is very easy, very repetitive in what we are doing. Honestly, it is not rocket science, what we are doing. Although it seems like it sometimes, and I get that; option trading can be hard area and hopefully, what we're trying to do here with part of this membership in doing these videos every single night is just to show you that it's just a matter of being very systematic and robotic about how you set up trades.

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Right now, the market is a little bit crazy. We do not see stocks drop by any big stretch, but it's a little bit more volatile than usual, and we see some good, implied volatility out there, and we're starting to build some positions across the board. That's the only thing that we want to do is start selling premium.

Whatever manner that is for you and your account size and start building these high probability trades. We're going to start here tonight with Yahoo. Again, we did the strangle on all of these traits, but as always in our trade comments, we mentioned how you could do this trade as an iron condor or risk-defined trade.

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Again, with Yahoo, you can purchase the 28 puts at the 40 calls, turn this into an iron condor. Again, it has the same exact features as a strangle, except what you're going to be giving up if you turn it into an iron condor is you're going to be giving up your initial credit, right?

You got to take some of this credit and purchase those options on either end, so you give up a little bit of your credit, but you can do it risk defined, and you really have less risk because now you are doing a defined risk strategy, so it's well for IRAs or more retirement accounts.

Again, for our size portfolio and what we want to do, we're okay. We're comfortable doing the strangle and keeping her position size small. In the case with Yahoo again, implied volatility, nice and high in the 68th percentile. We're doing this trade at a 70% probability and profit, like every other trade that we have.

What that means is that each side, or each leg, the 39 calls and the 39 puts, we sold at about the 15% probability of being in the money. About the 15 deltas on either end, so there are the 39 calls. We have the 29 puts down below the market. We've got a good wide range here in how far Yahoo can move.

Again, we are stacking this trade on top of our existing one. All we did is we went out to the probability of being in the money of about 15% on either end. You could see the markets move since we entered the trade originally, but that's all we're doing. We're just basically setting or short strengths exactly where it gives us an inside chance of success that the stock lands inside of these two data points of about 70%.

Again, that's very similar to what we are doing across the board. XOP is the same way, so we went ahead and sold three strangles in XOP. Again, took in a nice credit of about $.85. Implied volatility around the same IP rank in SOP, we sold 36 calls and 25 puts, so here inside of the platform, you can see, and again, we're doing very much the same thing on either side.

Markets have moved just a little bit since we entered the trade, but we are selling the 15% probability of being in the money on either end. Now, if you're coming into this trade, let's say you're coming into this trade the next day and you didn't have a chance to enter it yesterday, all you're going to do is you're going to look for whatever strikes have the 15% probability of being in the money.

In this case, you might adjust both strikes one dollar higher so that you're selling the 26 puts, which have about a 15% chance of being in the money, and you're selling the 37 calls, which have about a 15% chance of being in the money.

Again, the mechanics and the logic behind it remain the same, meaning you can do these trades, even if you miss the initial alert, the same idea and thought the process should go into this trade as how do we build the tray that has a 70% chance of success?

We sell the 15% probability of being in the money options on either end. That's our starting point. Again, very easy to do across the board. The last trade that we entered today is another one in P, which is Pandora. That wasn't a typo. I know there were some people that said, "Hey, you forgot the ticker symbol." No, that was it.

It just P as the ticker symbol for Pandora. I went ahead and sold the 17 calls and the eight puts down below the market. Pandora has an implied volatility rank that was in the 100th percentile earlier today. What that means is that we have to be super aggressive in getting into at least something additional on Pandora because implied volatility is at the highest point that it has been in the last year, and we have to take advantage of this.

This is an opportunity that doesn't come that often and a lot of stocks, especially a lot of these smaller stocks that are the lower price point, and you have to take advantage of these. I mean, this is where you make your money as a trader. You don't make your money when implied volatility is low.

You make your money when implied volatility is crazy high like this, and you can start to leg into and sell into some positions. Hopefully, that makes sense. Hopefully, that gets you over that hump. As always, we are always here to help with questions. Again, let's take some time to understand what we're trying to do.

There's a logic behind it. In this case, these three strangles, that's what fits our portfolio. You could have easily done the very, very similar cousin to these, if you will, and do the iron condors. In our case, we have the margin available to do the strangles, so we're going to do the strangles. We're going to take in more money.

We know, statistically, because we published our results in our report and our performance that statistically, the strangles is going to win out. They are going to be one of our highest profit generating strategies. We're going to do that. We're going to focus on those strategies when implied volatility is high.

As always, I hope you guys enjoyed these. Please let me know if you have any comment or questions. If you're watching this video somewhere else out there online or on YouTube, you just have to understand that you're getting this video into seeing these trades about 20 to 30 days after our members.

If you want real-time alerts and a video that goes along with it every single night like the one you're watching, you have to sign up for membership at OptionAlpha.com. Until next time, happy trading.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.