How the Short Strangle Strategy Works in Options Trading?

Options traders often look for strategies that benefit from time decay and stable price movement rather than strong trends. One such approach is the short strangle, a neutral options strategy commonly used when traders expect the underlying asset to remain within a defined range.

This article explains what a short strangle is, how it works, when traders use it, the payoff structure, margin requirements, and the risks involved so you can understand whether it fits your trading style.

What Is a Short Strangle in Options Trading?

A short strangle is an options selling strategy where a trader simultaneously sells:

• An out-of-the-money (OTM) call option

• An out-of-the-money (OTM) put option

Both options are written on the same underlying asset and have the same expiry date. The strategy earns profit from the premium collected, provided the price of the underlying stays between the two strike prices until expiry.

In simple terms, this setup benefits when the market remains range-bound and volatility stays low.

How the Short Strangle Option Strategy Works?

The working principle behind this strategy is straightforward:

• The call option loses value if the price does not rise sharply

• The put option loses value if the price does not fall sharply

• Time decay (theta) works in favour of the option seller

As long as the underlying asset stays within a defined price range, both options expire worthless, allowing the trader to retain the entire premium.

However, if the market moves strongly in either direction, losses can increase rapidly.

Types of Strangles in Options Trading

Strangle-based strategies can be classified into two main types:

Short Strangle

• Involves selling both call and put options

• Used in low-volatility or sideways markets

• Profits from time decay

Long Strangle

• Involves buying both call and put options

• Used when expecting high volatility

• Profits from large price movements

This article focuses specifically on the option-selling variant, which carries higher risk but offers consistent premium income in stable markets.

When to Use a Short Strangle Strategy?

This strategy is typically deployed when traders expect:

• Low price volatility

• No major events such as earnings, RBI announcements, or global cues

• The underlying to trade within a narrow range

It is commonly used in index options like NIFTY or BANK NIFTY during consolidating phases, especially close to option expiry when time decay accelerates.

Short Strangle Strategy Example (Step-by-Step)

Let’s understand this with a simplified example:

• NIFTY trading at 22,000

• Sell 22,500 Call at ₹90

• Sell 21,500 Put at ₹85

Total premium received: ₹175

Possible outcomes:

• If NIFTY expires between 21,500 and 22,500 → maximum profit

• If NIFTY breaks above 22,500 → losses on the call side

• If NIFTY falls below 21,500 → losses on the put side

The profit is capped, but losses can increase if the price moves sharply.

Short Strangle Payoff Structure Explained

The payoff structure of this strategy is:

• Maximum Profit: Total premium received

• Break-even Points:

• Upper = Call strike + total premium

• Lower = Put strike − total premium

• Maximum Loss: Theoretically unlimited

This asymmetric risk–reward profile makes risk management critical.

Margin Requirement for Short Strangle

Because this involves selling two naked options, exchanges require a higher margin compared to defined-risk strategies.

Margin depends on:

• Underlying asset

• Volatility levels

• Distance between strike prices

• Broker policies

In India, margin requirements are calculated using SPAN + exposure margins. Traders should always check margin availability before entering the position.

Risks and Limitations of Short Strangle

While attractive for premium income, this strategy carries notable risks:

• Unlimited loss potential during strong trends

• High margin blocking

• Sensitive to volatility spikes

• Requires active monitoring

Sudden news events or sharp market moves can quickly turn a profitable setup into a loss-making one.

Short Strangle vs Short Straddle

Although both are neutral option-selling strategies, they differ in structure:

Traders often prefer strangles when they want a wider safety range.

How Traders Manage Risk in Short Strangle?

Risk management is essential when deploying this strategy. Common techniques include:

• Using stop-loss orders on individual legs

• Adjusting positions when price nears a strike

• Converting into an iron condor

• Avoiding trades during high-impact events

• Limiting position size

Experienced traders rarely leave such positions unattended.

Is Short Strangle Suitable for Retail Traders?

This strategy is not ideal for beginners due to:

• High margin requirements

• Complex risk profile

• Need for continuous monitoring

Retail traders with prior options-selling experience, discipline, and risk control mechanisms may consider it under favourable market conditions.

Conclusion

The short strangle strategy is a volatility-based options selling approach designed to profit from stable, range-bound markets. By selling out-of-the-money call and put options, traders earn premium income as time decay works in their favour.

However, the strategy carries significant risk if the market moves sharply. Proper position sizing, margin planning, and risk management are essential before using it in live trading.