I’m a collector of stories, a fanboy of metaphors. Any time I come across a clever way of explaining a trading trick or embellishing a strategy, I add it to my ever-growing bag of teaching tactics.

If my first attempt at helping you understand an options strategy falls flat – worry not. I can try again from a different angle. And again. And again. Eventually one will take, and you’ll walk away wiser.

Take the seemingly scary short strangle, for instance. At first blush, her unlimited risk frightens many away. Those who curb their kneejerk judgment and stick around often find her downright charming. Indeed, the short strangle boasts a few redeeming qualities that more than compensate for her dark side.

Structure

The short strangle involves selling a naked put and a naked call. Typically we use one- to two-month options and sell out-of-the-money strikes with deltas less than 0.20. This creates a wide profit range with a high probability of profit. The aim is to have the stock sit between both options so that they expire worthless, thus allowing us to pocket the credit received upfront. It’s a bet on neutrality or a rangebound market that also gets you short volatility. In Greek-speak, we are delta neutral and negative vega.

The risk graph paints a picture of exactly what type of profit or loss is in store.

The Gamma Angle

When viewing this strategy from the perspective of gamma, things get interesting. We all agree the way traders make money is by buying low and selling high. Training yourself to buy dips and sell rips is harder than it looks because it goes against your emotions. Lower prices bring fear and dampen your desire to buy. And yet, that’s precisely what you should do. Higher prices bring greed and thus dampen your desire to sell. But you should.

Enter the short strangle.

One of her oft-overlooked characteristics is negative gamma. It’s a force that gets you bullish at lower prices and bearish at higher prices. Automatically! No need to fight your emotions to buy the dips – she’ll do it for you. No more wrestling with selling rips – it’s taken care of.

The net effect of selling a naked put is you’re obligating yourself to buy at lower prices. On the flip side, the naked call forces you to sell at higher prices.

Can you think of a situation where this would come in handy? Suppose a stock sits at $100, and you think to yourself:

“I wouldn’t touch it here, but on a pullback to $95 I’d be interested. And, it’s already extended so if it rallies further to $105 I’d be a willing seller. “

This is the perfect scenario for a short strangle. Sell the 105 call and sell the 95 put. Voila! You’re in a position that will get you long into weakness and short into strength.