Strategies · Library · Options
§2.26Volatility
Short strangle
Sell a call above and a put below the price. The winning range is wider than a short straddle's, but the credit is smaller.
- Asset class
- Options
- Held for
- To expiry
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Expects the price to stay inside a wider range and volatility to settle or fall.
- Entry and exit
- Sell an out-of-the-money call and an out-of-the-money put, same expiry. Buy back if either strike is threatened, or let expire.
- Sizing
- 1:1 (one short call at a higher strike, one short put at a lower strike)
How it fails
- Losses unlimited on a break above the call strike and very large below the put strike
- Gain capped at the credit
- Wider profit zone than a short straddle
- Volatility jumps and gaps can hurt; margin heavy
Data it needs
- options chain with strikes and premiums
- implied volatility by strike and expiry
- underlying daily price
ARCANE has the underlying daily close but no options chains, strikes or implied volatilities
How ARCANE uses it
Matches a Call that the S&P 500 stays inside a range by a date; the short strikes are the range edges. Paper only.
Selling options is not buildable.
Filed under the volatility card
Hold less after a month of high volatility and more after a calm one. The paper found this raised return per unit of risk, because volatile spells are not paid for with higher returns.
A paper plan from this card holds 5 to 63 days, stops at 2.5× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §2.26, p. 28 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.