Covered Strangle Strategy

The Covered Strangle is a bullish-to-neutral options strategy that combines a long stock position with a short strangle—selling both an out-of-the-money (OTM) call and an OTM put. It’s essentially a covered call plus a cash-secured put, designed to generate income while being prepared to buy more shares if the stock drops. This strategy suits investors who are comfortable with assignment risk and want to enhance returns in rangebound or modestly rising markets.

Structure

• Own 100 shares of the underlying stock
• Sell 1 OTM Call (Strike C above current price)
• Sell 1 OTM Put (Strike A below current price)
• Both options typically share the same expiration date

Profit & Loss Profile

• Max Profit: Premiums received + stock appreciation up to call strike
• Max Loss: Significant if stock drops below put strike—losses from long stock and short put
• Breakeven: Stock purchase price minus total premium received
• Greeks: Delta-positive, Theta-positive (double premium decay), Vega-negative (short volatility exposure)

Example

You own 100 shares of XYZ at $100. You:

• Sell 1 x $105 Call for $2.00
• Sell 1 x $95 Put for $2.50

Net credit = $4.50. Breakeven ≈ $95.50. If XYZ stays between $95 and $105, both options expire worthless and you keep the full premium. If XYZ drops to $90, you lose $10 on the stock and $5 on the put, offset by the $4.50 premium → net loss of $10.50.

Ideal Market Conditions

• Outlook: Neutral to moderately bullish
• Volatility: Elevated IV improves premium income; falling IV post-entry is favorable
• Time Horizon: Short- to medium-term
• Goal: Generate income while holding stock, with willingness to acquire more shares if assigned

Risk Considerations

• Downside risk is magnified—losses from both long stock and short put
• Short put is not covered—may trigger margin call or require additional capital
• Early assignment risk on both legs, especially near ex-dividend dates
• Requires strict discipline and risk management—losses accelerate below breakeven
• Not suitable for volatile or bearish markets

Summary

The Covered Strangle is a high-premium, high-risk strategy for confident traders with a neutral-to-bullish outlook. It offers income potential but demands careful monitoring and downside protection. Best used when volatility is high and the trader is prepared to manage margin and assignment risks.