Selling Strangles
How to sell short strangles for premium income with undefined risk — and how to manage that risk
We're recording short 2-3 minute video explainers for every lesson. The full written guide is ready below. Bookmark this page — the video will appear right here when it's ready.
Selling Strangles
Selling strangles is where the training wheels come off. You sell a naked call and a naked put on the same underlying, same expiration — no protective wings. The premium is bigger, the profit zone is wider, and the risk is theoretically unlimited. This is a professional strategy that requires experience, capital, and discipline.
The Structure
- Sell an OTM put
- Sell an OTM call
- Same expiration, different strikes
- No long options for protection
Real Example
SPY at $450. You expect it to stay range-bound for the next 45 days.
- Sell the $430 put (16 delta) for $4.50
- Sell the $470 call (16 delta) for $3.80
- Total credit: $8.30 ($830 per strangle)
Breakeven (lower): $421.70 ($430 - $8.30) Breakeven (upper): $478.30 ($470 + $8.30) Profit zone: SPY stays between $421.70 and $478.30 — a $56.60 range (12.6% of the stock price)
That is a massive profit zone. Compare it to an iron condor where the wings might cost $3.00 of that credit, netting only $5.30 with a narrower breakeven range.
Why Sell Strangles Instead of Iron Condors?
More premium. Without buying protective wings, you keep the full credit. An iron condor on the same strikes might collect $3.00 to $4.00 instead of $8.30.
Wider breakevens. The extra credit pushes your breakevens further out, increasing your probability of profit.
Better rolling opportunities. When a side is tested, you can roll it independently. With an iron condor, the wings complicate rolling.
Lower transaction costs. Two legs instead of four means lower commissions and less slippage.
The Risk: It Is Real
A short strangle has undefined risk on both sides (though the put side is limited to zero). If SPY gaps down 10% on a black swan event, your $430 put is now deep in-the-money and your loss could be $2,000+ per contract before the credit.
This is not theoretical. In March 2020, SPY dropped 34% in a month. A short strangle at 16 delta strikes would have been devastated on the put side.
Risk mitigation is everything with this strategy.
Position Sizing: The Critical Factor
Rule 1: Never allocate more than 3% to 5% of your account's buying power to a single short strangle.
On a $100,000 account with portfolio margin, a SPY short strangle might require $8,000 to $12,000 in buying power. That is 8% to 12% of your account — already pushing the limit. Many traders cap it at one or two SPY strangles per $100,000.
Rule 2: Total strangle exposure across all positions should not exceed 50% of your buying power. Keep the other 50% for adjustments, new opportunities, and margin cushion during drawdowns.
Managing Short Strangles
Close at 50% of credit. You collected $8.30, buy back the strangle at $4.15. Profit: $4.15 ($415). This is the same rule as credit spreads and it is even more important here because the tail risk is larger.
Close at 21 DTE. If the trade was opened at 45 DTE and has not hit 50% profit by 21 DTE, close it anyway. Gamma risk increases exponentially in the last three weeks. You do not want a large undefined-risk position with high gamma.
Roll the tested side. If SPY drops to $435 and the $430 put is under pressure, roll it down and out: buy back the $430 put, sell the next month's $425 put. Collect additional credit and give yourself more room.
Defend with stock. If the put side is tested and you want to stay in the trade, buy a small amount of SPY shares (or SPY futures) to delta-hedge the position. This reduces your directional exposure without closing the strangle.
Close at 2x credit on one side. If the put alone has moved from $4.50 to $12.00 (roughly 2x the total credit), close the entire strangle. The thesis is broken.
Who Should Sell Strangles?
This strategy is appropriate if:
- You have at least $50,000 in your account (preferably $100,000+)
- You have portfolio margin approval (standard margin ties up too much capital)
- You have traded iron condors successfully for at least 6 months
- You understand and accept the risk of unlimited loss
- You have a clear management plan written down before entering
- You can watch positions daily
If any of those are not true, stick with iron condors. The defined risk is worth the premium you give up.
The Short Strangle on Individual Stocks
SPY is the most common underlying for short strangles because it does not have earnings gaps, is incredibly liquid, and diversified across 500 stocks. But some traders sell strangles on individual stocks.
If you do this:
- Avoid holding through earnings (the gap risk is enormous)
- Size even smaller (1-2% of buying power per strangle)
- Only use liquid, large-cap stocks
- Be prepared for 10% moves in a week on individual names
AAPL, MSFT, GOOGL, and AMZN are reasonable candidates. Anything below $50 billion market cap is probably too volatile.
Strangle vs. Jade Lizard
If you are uncomfortable with naked risk on the call side, consider the jade lizard: sell a put and a call spread (instead of a naked call). This eliminates upside risk while keeping the naked put.
SPY at $450:
- Sell the $430 put for $4.50
- Sell the $470/$475 call spread for $1.80
- Total credit: $6.30
Upside risk is now capped. Downside risk is still naked but you collected $6.30 — close to the full strangle credit with half the risk profile eliminated.
Selling strangles is the purest form of premium selling. The returns can be excellent but the risk requires respect. Next: portfolio margin, which makes strategies like this capital-efficient.