Hi, this is John Andrus from options monstercom

I want to welcome you to my course on executing and managing the short strangle

In this course

I will introduce you to a very popular option strategy

The short strangle

I must assume that the author of the name of the strategy, short strangle selected the name from his interpretation of the visual from the wrist

Graph

Shown on this slide

I would encourage you not to get hung up on the name or any of the other names associated with options strategies

I have often thought that the strange names for many of the strategies is to confuse the novice Trader in discouraged and becoming a self-directed investor

The illustration that you see on the slide is the risk profile for the short strangle many traitors like to use the risk graphs to Aid them in visualizing, the risk-reward on the trade Eyemart, strikes of

the short put and short call on the wrist graph

The green shaded area is where the trade is profitable, where the arrows penetrate, the zero line are the break-even stripe

We construct the shorts triangle, with one or more short calls and one or more short puts on the same Security

In the same expiration cycle

We can construct a short strangle with an unequal number of short calls, and short puts, especially when the trailer wants to skew the trade either, to the bullish side or the bearish side

In most short, strangle trades

The number of short calls is equal to the number of short puts in the shorts

Triangle

We placed the short calls and the short puts at out-of-the-money strike

I should duly note that are shorts triangle is an undefined risk trade

What does that mean? It means that the traitor has unlimited risk on either side of the trade and that keeps many Traders from using the shorts triangle while I cannot deny the unlimited risk of the

strategy

I will point out to you later in the course

Why the short strangle is Far and Away my favorite strategy

In this slide, I want to introduce you to the normal distribution curve, while the math behind it is very simple

It is of utmost importance that you indelibly etched this in your brain, the entire basis of the shorts

Triangle trades, I execute relies on the probabilities presented on this simple tool

Let me touch on the basics now

As you can see on the chart, the one standard deviation range contains price 683%

of the time you may ask, what does that mean? Very simple, if we put on a short strangle where the short call and the short put are placed at the one standard deviation strike

There is a 683%

probability that price will remain within those two strikes, for the duration of the trade

Same goes for the two standard deviation strikes, 955%

of the time price

A between those strikes for the duration of the trade

And while we rarely trade a 3 standard deviation, strangle, it will contain price 997%

of the time

The basis of constructing, strangles in my world is wrapped around the statistical probabilities that you see on the distribution curve in this slide

As an option Trader

Do you need to gain an innate knowledge of the most important Greeks, Delta Theta, gamma Vega

And to a lesser extent, rho evaluating potential trades and adjustments

The most important Greek is Delta

They Define delta as the amount of change in the options price for a $1 change in the Securities price

We also use Delta as a back of the napkin way to define the probability of the option, strike to expire in the money at expiration

Delta's also are used to reflect the bias of an individual trade, or an entire portfolio of stocks and ETFs

The Delta of a call is a positive number

The Delta of a put his negative that should make sense to you

Because if you buy a call, you are expecting the stock to rise

Conversely

If you buy a, put your bias is for the stock to drop in price

This slide will familiarize you with the option chain and specifically Delta on the option chain

The calls are on the left side and the ports are on the right side

I highlighted the Delta column for both the calls and the puts with a green rectangle

In this example, let's assume the price of the underlying Financial instrument is $150 per share

What is Illustrated on the slide is basically a one standard deviation strangle? When this flight was created the 165 strike, call was the closest call to the 16, Delta the 135 strike

On the foot side was closest to the 16, Delta put this action would create a one standard deviation strangle

The 16 Delta strike on the call side and a 16, Delta strike

On the put side, each has a probability of 84% of remaining out of the money at expiration

I am often asked, then how do you come up with a 68% for the one standard deviation range? Take 100% and subtract 16% on each side for 100% - 16% - 16% equals 68%

Again, in this example of one standard deviation trade would sell the 165 call and sell the 135

Put the 165 call has a Delta of 19, the 135 put has a Delta of -17

Remember that calls have positive deltas and puts have negative deltas

Refer to the screenshot of the sample, trade on the right side of the chart, a short strangle trade would sell the 165 call and the 135

Put the 165 call has a Delta of 19, the 135 put has a Delta of 17

We calculate the initial Delta of the trade this way

In this one standard deviation short, strangle

We are selling the options, not buying them

Because we are selling the options we multiply the Delta of each option by -1

At the time of trade execution, the call side would be short 19 Delta's

The put side would be long, 17 Delta's

The Delta of the trade is calculated by adding the long, 17 Delta's to the 19 short deltas

The obvious answer is -2 deltas

It is important to note the difference between the Delta of a stock or ETF and the Delta of an option

The Deltas for options are dynamic as they are constantly changing because of the change in any of the key components that generate the price of the option

Those components are price of the underlying security

Implied volatility of the underlying security

Days to expiration for the option

Risk-free interest rate

To calculate the net Delta's of a position, simply total all the Deltas

The net

Delta of a trade will show whether the trade has a long bias, a short bias, or a neutral bias

Is the net

Delta position is positive

The trade has a long bias

Is the net

Delta position is negative

The trade has a short bias

The Delta of a security instrument is static

One share of stock equals 1 Delta

If the trader buys 100 shares of stock

He creates 100 Delta's

The Delta value of the stock does never changes

When the one share of stock is sold short, the short share of stock has a Delta of -1 the sale of 100 shares of any stock or ETF, will create negative 100 Delta's

The net

Delta of any trade provides, the current bias of the position

We start most strangles with a neutral bias

We also use the Deltas of a trade to provide us with a back-of-the-napkin probability of the trade expiring in the money or out-of-the-money refer to the sample trade in the option chain on the right

The cold side would have a 19% chance of expiring at or above the 165 strike

The putside 135 strike would have a 17% chance of closing at or below that price at expiration

To calculate the probability of profit for this trade start with 100% - 17% - 19% equals 64%

Understand that are using Delta's of a trade to calculate probabilities is really a quick back-of-the-napkin approach

Complicated formulas black-scholes being the most common precisely calculate the exact probabilities of a trade option

Chains have probability in the money and probability out-of-the-money, metrics available to display

However, for the retail Trader using Deltas for probabilities is quick and adequate

We play short, strangles and implied

Volatility rank is 25% or higher

We play short, strangles between 25, and 60 days to expiration

Shorts triangles are excellent or adjusted as needed when the trade has 21 days to expiration shorts, triangles are closed

When the debit to close is 50% of the premium collected

Some Traders will exit strangles if they can collect 25% of the premium in 7 days or less

Less than 25% of strangles will need some kind of adjustment

Simple adjustments, are rolling out the strangle one or more expiration cycles for a credit

Less than 5% of short strangles executed for the probability based criteria will require more excessive adjustments

The shorts triangle is typically at delta neutral trade

They called Delta and they put value have the same value and cancel each other out

16 positive Delta's

+ 16 negative

Delta s equals zero Delta's

The trade is delta neutral

But what is a traitor to do? When the shorts triangle Goes Wild? First become a mechanical

Manage the overall, net Delta position of the trade

Do not micromanage every minor change in the price of the security

This will lead to being whipsaw

Many new Traders tend to freak out with every move in the price of the underlying stock or ETF

Constantly adjusting a trade, is a recipe for inconsistency

Remember markets move

If you trade expect to encounter what I refer to as trades, Gone Wild

If you accept, you will have your share of these trades, then learn how to deal with them mechanically and without emotion

Many times your trade will show an unrealized loss even though price has remained between your short strikes

Most often the cause is an increase in the Securities volatility

If the price of the underlying remains between the short strikes, remain patient and mechanical there is no reason to adjust immediately

Should the price of the security near one of the short strikes, but without breaching that strike, you may choose a just by neutralizing the Deltas by 50%

Neutralize by 50% simply means roll

The untested side to the strike that has a Delta of 50% of the strike of the tested side

I would caution you that if rolling the untested side to neutralize Delta's by 50% results in a tiny, increase in premium, then wait, there is no reason to tighten the spread without being paid appropriately

If one of the short options is breached, take aggressive mechanical approach to adjusting the trade, only adjust the untested side, roll the put up or roll the call down

The first and best adjustment is to roll the untested side to a Delta that is approximately 50% of the tested side, Delta

Strangles that are one standard deviation or why the required adjusting less than 20% of the time

Most of those strangles at require some adjusting need simple modifications

Then you will encounter strangles that have not just gone wild, but have really gone wild

That has moved well beyond one of the short options, the trade requires aggressive but still mechanical adjustments

Beyond the common adjustment of rolling

The untested side to a Delta value, that is 50% of the tested side

It may be necessary to create an inverted strangle

we create an inverted strangle when price breaches, the short call and a short put is rolled to a strike above that of the call or when the short put is breached, and a short call is,

rolled to a strike below the price of the short put When is short strangle becomes inverted, the trailer has mitigated the loss, but must realize that a potential loss is blocked in the intrinsic value of

the inverted

Strangle is the spread width of the trade

The extrinsic value is the current price for the inverted

Strangle less the intrinsic value

The option chain on the left is the standard 165 by 135 short, strangle

Price remains between the short strikes, the chart on the right assumes that price has breached the 165 strike, making it necessary to roll up to put above the short call and creating a 175 by 165

inverted

Strangle

Currently the spread of the inverted strangle is 10 points

The very least amount to close

This trade is $10

If the price of the underlying is between 165 and 175 at expiration

Most of the time, an inverted strangle can be closed for about $1025

on expiration day

If you don't close the trade most Brokers with exercise both sides for you

They will charge you the spread with to close the trade

Some Brokers will add an assignment fee for each leg

Important considerations with the inverted

Strangle

In regular shorts triangle with a called strike is above to put strike

There is the potential that both options will expire worthless with the inverted

Strangle

If price stays between the short strikes, the minimum cost to close the trade is the spread with The intrinsic value of the 175 by 165 inverted

Strangle is $10

That equates to $1,000 for each one contract lot

The current value of the 175 by 165 shown on the previous slide is $2680

Therefore, it would cost $2,680 to close the trade at this time

The extrinsic value of the 1000

wide inverted

Strangle is $2680

- $10 equals $1680,

or $1,680 for each one contract lot

Assuming the goal of the Traders is to minimize the loss or even make a profit with the inverted, strangle

It is incumbent upon the traitor to accumulate premium in an amount equal to or greater than the spread with each subsequent adjustment of the inverted strangle should generate additional premium for narrow, the width of the

inversion

If the traitor can narrow the width of the inversion and pick up some additional premium even better

Managing an inverted

Triangle is materially different from managing a conventional strangle

When we adjust a regular strangle to create an inverted, strangle that die is cast

So to speak

And potentially a laws has been blocked in

The reason the loss is potentially, locked-in is now the absolute best exit on an inverted

Strangle is the spread width of the position in the short 175 put and short 165 call inverted

Strangle that we looked at earlier

The minimum amount to exit the position is $10 per contract

For many Traders, there is the urge to micromanage the inverted

Strangle

It is not comfortable watching a significant unrealized loss on your platform

What is a Paramount importance to understand about the inverted? Strangle is there are no adjustments to do as long as price stays between the short options

You must exercise patience and allow the daily thing to come out of the trade

It does not matter if the price of the underlying spikes up or down and the loss on the trade is gyrating wildly as long as price stays within this triangle

It is not uncommon at a $10 wide inverted

Strangle shows a debit to close the trade of $15 or more

The longer the trade has two expiration, the higher the unrealized loss

You should expect to see understand that, the trade will eventually come in all the way to its intrinsic value

The goal of the traitor in managing the inverted

Strangle is to accumulate as much or more premium than the spread width of the inversion narrow, the width of the trade or both

When the trader has collected enough premium to cover the spread with he, or she has managed to trade successfully

The option chain on the right side of the slide is an actual snap, 80 x, 70 inverted, strangle

Note, the Delta and Theta values are reversed because it displayed the closing order to generate the current price of the inverted

Strangle, the current metrics for the position are The price of snap is $75 per share

The current price to close the position is $1685

The intrinsic value of a 10-point wide inverted, strangle is $10

The extrinsic value is $685

that is derived by taking the current price to exit, the inverted, strangle $1685

and subtract the intrinsic value of $10

There is $1792

per day in faded 2K

The Delta of the trade is -727

Place a good until canceled order to close the trade for $1025

plus or minus by having a working order

For slightly more than the width of the inverted, strangle

We can monitor the trade daily

As long as price remains between the short, 70 call and the short 80, put, no adjustment is necessary

When the mid-price to close the position, Muse the price of $1025

It is time to adjust

Here is the proper way to adjust the trade roll, the inverted strangle out one or more expiration Cycles

Do not increase the width of the inversion reduce the weight of the inversion

If possible, but only for a credit or 0

Do not add more Capital to the trade

This example is a Baidu 155 by 150 inverted

Strangle

There are 20 days to expiration

The current price of Baidu is $162 per share

Note on the bottom of the chain at the price to close

This five-point wide inverted

Strangle is $1785

The intrinsic value of this position is the width of the inversion or $5

Because the price has breached the short 155

Put the extrinsic value is a huge $1285

The daily theater of the trade is -4633

deltas

Price, having breech the short 155 put on a strong at move-in Baidu, necessitates an adjustment

When adjusting an inverted strangle, the goal is to roll out for a shorter period of time as possible for a zero or credit

The implied volatility of Baidu is elevated which allows the current position to be rolled out

One week

We are able to roll up the inverted

Strangle to hire strikes, recenter the price and retain the $5 inversion for a credit of $2

There is nothing else to do with this position

As long as price days between 160 and 165

Set up a good until cancelled order for $525

debit and monitor the position for two potential outcomes

One Price stays between the two short options, do nothing

Two twin size breeches, either short option

Adjust the trade in this manner

Roll the inverted, strangle re-centering the price while maintaining the spread with for a credit or 0

Be narrow, the width of the inverted, strangle if possible for a credit or 0

C, adjust the trade to the shortest amount of additional time

Summarizing the execution and management of the shorts triangle

A strangled is the simultaneous sale of an out-of-the-money call, and an out-of-the-money put in the same underlying in the same expiration cycle

This triangle is an undefined risk trade

Delta is an important metric in executing shorts

Triangle trades

We typically sell the short call at a Delta of 20 or higher and we sell the short put at a Delta of 20 or lower

The shorts triangle has two Breakeven price points on the call side as the amount of total premium collected to the strike of the short

Call on the put side subtract the amount of total premium collected from the strike of the short

Put in one standard deviation, strangles price remains between the short call and the short put 68% or more of the time

When is strangle goes wild and necessitates adjusting to an inverted, strangle always adjust the trade, so to receive additional premium without increasing the width of the inversion? Never add additional Capital to the trade

A few facts about short, strangles

Most short, strangles are delta neutral short, strangles or undefined risk trades

Brokers, establish the risk of a short strangle for buying power, reduction purposes, at approximately the two standard deviation level

Depending on your bias shorts

Triangles can be skewed either by Delta or by the amount of Premium collected on the short, call versus the short put in this manner

Remember the higher the Delta of the option, the closer, the strike is to price

If you have a bullish bias, please, the short put option at a higher Delta, which would be closer to price than the Delta of the short call

You can also screw the shorts triangle by selling more puts than calls if you are bullish

If your bias is bearish please, the short call option at a higher, Delta, closer to the price of the underlying than the Delta of the short, put you can sell more calls and puts if you

are bearish

Thank you for purchasing my course executing and managing the shorts triangle

I hope that the course brought a little Clarity to trading the shorts triangle and you picked up a few nuggets along the way

On this slide, you will find my contact information and the links to some of the content that I have created

If you have not joined the options Meister, Facebook group, I would encourage you to do so

It is free to join and I provide content and help Traders with their trade related questions

Also, please subscribe to my YouTube channel and you will receive notification when I post new trading videos

Finally, if you are an active options Trader, you may have an interest in my gold level membership

It includes a live trading room and two, private Skype groups

I post all my new trades throughout the trading day in real time

I also post all exits and adjustments in real time

I am available throughout much of the trading day

So you have access to me for any trade related questions

If you would like to speak with me, my phone number is 513-518-6666 and I answer my own phone

I would be happy to speak with you

Most anytime

I love talking with other trailers

I am in the Eastern Time Zone

If you have Skype, send me a contact request

My Skype

ID is Johnny underscore

F l a Good luck and great Trading