Lesson Overview

Short Strangle

Short strangle could possibly be the ultimate strategy for options traders. Though it requires more capital with naked options on either side, theses strategies offer the highest probability of success of any trade and generally the highest P&L long term.

A combination of selling a call and put naked we like to sell options at the 1 SD level (or 15% prob ITM) on either side. This gives us a high win rate long term and maximizes our profit because we do not have to buy protection (as we would with an iron condor).

Notice: we don't recommend these strategies for smaller accounts because of the margin usage and instead prefer if you have a smaller account to trade iron condor alternatives.

More Discussion

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  • Linda

    what is considered a smaller account? 25k?

    • I think anyone under $25k should be cautious about using these and just double check that 1 trade doesn’t take up more than 5% of your account balance in margin.

  • 1) Likely not since IV isn’t high enough. 2) Diagonals profits a little from rising IV whereas debit spreads don’t as much.

    • scottie

      Thanks!!

  • Yeah just depends on the margin required but you can absolutely use that as a baseline.

  • What I mean is that you have to realize that implied volatility always overstates option pricing, i.e. option pricing is always theoretically rich or over-priced over time.

  • We suggest around $25k as a starting point – otherwise you should trade iron butterflies.

    • Lotus Josephine

      You rock!

  • We’ve done tons of backtesting on this – many more items than we could post in this small comment area. We’ll be releasing our backtesting software soon so you can do it too.

  • Lots of variations; different strategies, different portfolio sizes, allocations, strike width, IV rank, profit targets, stop-losses, etc.

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