This week we’re exploring 5 ways to manage a losing short strangle.
Notes: Short Strangle
- Sell $95 call for $1
- SBUX @ $85
- Sell $75 put for $1
- Net Credit/Max Reward $2
- Max Risk Unlimited
- Initially Delta neutral
PROBLEM: SBUX has risen beyond short call strike and the entire strangle is worth $5.30.
Unrealized loss is $3.30. That’s 1.5 winners. Not terrible for a high probability system
Management Ideas
- Exit the losing side if you reach your short strike price or expiration breakeven.
- Roll the winning side closer. You get a CREDIT when you do this. It reduces the overall risk by the amount of the credit. Take profits on Dec $75 naked put and selling a Dec $80 or $85 naked put.
- Be patient and see if the stock comes back into the range. This is now a bearish trade. Maybe that’s ok if the rest of my portfolio is bullish.
- Roll the losing side further OTM. You pay a DEBIT when you do this. It improves your probability of profit. Take loss on Dec $95 naked call and sell a Dec $100 or $105 naked call.
- If you ride this to expiration, you could allow assignment. You become short 100 shares of stock at the strike price.
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