Straddles and Strangles are an advanced options strategy that are suited to more experienced traders looking for a neutral move in the underlying asset. Both of these strategies require a high amount of margin and a level 4 or level 5 account (depending on brokerage). Straddles and Strangles are an unlimited risk strategy as they require short positions in a call and put. 

Short Straddles

Investors looking to sell a straddle should have a neutral view on underlying stock or ETF. Shorting a straddle requires selling a call and put at same strike and expiration. This results in a premium collected which acts as the buffer – the distance from the strike price where the stock cannot exceed the strike + buffer amount in order to remain profitable. 

• Max reward = premium collected
• Max risk = unlimited
• Breakevens = strike price + total premium collected, strike price - premium collected

This trade remains profitable if the stock is within the breakeven prices. It starts to lose money if the strike price moves out of the breakeven range. The further the stock moves away from the breakeven, the more the trade will lose. Straddles do provide more of a cushion compared to selling a naked call or a naked put on its own. The risk profile is similar to that of selling a naked call or put, but the trade generates more premium. However, unlike selling a naked call where the trade is profitable if the stock declines significantly, or a naked put where the trade is profitable even if the stock rallies significantly, the underlying's price has to stay neutral and within the two breakeven areas.

Example:

Stock $XYZ currently trading at $100:

• Sell 1 month $100 Call @$4
• Sell 1 month $100 Put @ $4
• Collect a total of $8
• Max reward = $8
• Max risk = unlimited
• Breakeven between $92 and $108

Short Strangles

Short strangles are a strategy where the investor has a neutral view on underlying stock or ETF. This strategy requires selling an out of the money call and a put with the same expiration date but different strike prices. This collects less premium than a straddle, but this allows for the breakeven prices to be further away than a straddle. 

• Max reward = premium collected
• Max risk = unlimited
• Breakevens = strike price(short put) - total premium collected, strike price (short call) + premium collected

Example:

Stock $XYZ currently trading at $100:

• Sell 1 month $105 Call @$2
• Sell 1 month $95 Put @ $2
• Collect a total of $4
• Max reward = $4
• Max risk = unlimited
• Breakeven between $91 and $109

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Like Strangles, this trade remains profitable if the stock is within the breakeven prices. It starts to lose money if the strike price moves out of the breakeven range. The further the stock moves away from the breakeven, the more the trade will lose. Strangles provide more of a cushion compared to straddles but generate less premium. 

Options Greeks

The Greeks have an important role in both these strategies:

Short Straddles

• Short Volatility (Vega) - when selling an option, the trader is short volatility (declining volatility works in favor of the trader). In the case of a straddle, it is double short Vega as two options are being shorted. 
• Short Theta (Time Decay) - time decay works in favor of an option seller. Like Vega, straddles are exposed to double the time decay of a naked call or put. The options' price will decline with time and the trader can buy to close the position at a lower price.
• Delta neutral initially but drifts quickly - Assuming the call option has a -50 Delta and the put option has a 50 Delta, both legs offset each other resulting in a net 0 Delta trade. However, as the stock drifts further away from the strike price, the Delta exposure gained cancels out the benefits of Theta and Vega working in the trader's favor. 

Short straddles work best for lower priced ($100) and high IV Rank (implied volatility) stocks. High IV options have a higher probability of the IV moving lower and reducing the price of the option. Traders should look to maximize the premium collected from selling a straddle. This increases the breakeven buffer on the trade. For example, if a straddle collects 8% of a $100 stock ($8 premium), the stock price will need to move higher or lower by $8 for the trade to become unprofitable. When selling straddles, traders should avoid earnings announcements and catalysts that have the potential to move the stock price significantly higher or lower. 

Short Strangles

• Short Volatility (Vega) - when selling an option, the trader is short volatility (declining volatility works in favor of the trader). In the case of a strangle, it is double short Vega as two options are being shorted. 
• Short Theta (Time Decay) - time decay works in favor of an option seller. Like Vega, strangles are exposed to double the time decay of a naked call or put. The options' price will decline with time and the trader can buy to close the position at a lower price.
• Delta neutral initially but drifts slowly - Unlike straddles, a drift in the underlying stock price affects Delta slower than it would for a strangle. 

Short strangles work well for stocks in the $100-$500 price range. Investors looking to sell strangles should look at similar conditions to straddles - High IV, high premium received compared to stock price, and avoid earning and other catalysts that may cause a significant move in the underlying's price. 

Optimal Strategies and Trade Management

Generally, investors should look to sell straddles and strangles at roughly 45 days to expiration. This usually generates a decent premium while also taking advantage of accelerating time decay. Here are the best practices for straddles and strangles:

Straddle

• Strikes - Sell ATM call and put
• Take Profits - At 25% of max gain OR 30 days to expiration. Traders choosing to roll this strategy should roll it to another 45 DTE.
• Stop Loss - At 50% of max gain. 

Strangle

• Strikes - Sell 15-30 Delta call & put
• Take Profits - At 50% max gain OR 21 days to expiration
• Stop Loss - Roll untested (profitable) side up/down to 45 DTE. This creates a narrower strangle and collects more premium and gives more protection. 

Both the straddle and strangle require a high amount of margin. Have to account for selling 2 naked options. The margin requirement is the greater of the two sides' short, uncovered margin requirement plus the premium of the other leg. Roughly 20-30% range of underlying's price multiplied by 100. For a $100 straddle, the margin requirement would usually be between $2000 - $3000. 

Straddles and Strangles are complex options strategies that are more suited for experienced traders. Both these strategies are unforgiving and have unlimited losses if not managed correctly or if the underlying makes a significant move in either direction. The upside to this strategy is that it generates a sizeable income compared to selling naked calls and puts and Vega and Theta work in favor of the seller.