A portfolio generally consists of long positions in stocks and ETFs. If markets go up, you win – if they go down, you lose. Obviously, elements like dividends can make your investments grow even if markets don’t go up. But there are more ways to earn money without indices going up or down.
Selling index options with a different exercise price but the same expiry date is called a sold short strangle. This strategy consists of simultaneously selling a call and a put option with the same expiry date. By selling out-of-the-money options you receive a premium. If the price of the index stays between the strike prices of the call and put option, you earn the full premium.
You can use short strangles on the majority of the known indices on a daily, weekly and monthly basis. The options are listed with specific symbols for the monthly, the weekly and the daily series.
The short strangle option strategy is a limited profit, unlimited risk option trading strategy that is taken when you as an option trader think that the underlying index or stock will experience little volatility in the near time. Short strangles are spreads that provide you with a premium.
Buying index options:
This is also known as going long. You can also use this as an individual strategy or to protect your sold option positions.
If you want to have more security and reduce risk on your sold strangles, you can choose to buy options around your sold options. If the market would show a sharp rise or fall during the period that you have sold options, your loss is limited by the long call and/or put.
Buying a call and put simultaneously is called a long strangle, a long strangle combined with a short strangle is called an Iron Condor.
In this video we will show you how this works in practice, first a short strangle followed by an Iron Condor.
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