Details about Short Strangle Option Trading with Payoff Chart explained with an example
Continuing further from our previous article Short Strangle Options Introduction, in this article we will cover the Example and Payoff Functions of Short Strangle
Suppose the GE stock price is currently trading at $50 per share (just an example). You know that this stock may not move much in the next one month of expiry and is expected to stay somewhere around the current price of $50. Hence, you take the following positions for creating a Short Strangle Option Trading.
1) Short Put with OTM strike price of $40 sold at the price of $4 &
2) Short Call with OTM strike price of $60 sold at the price of $4

Since there are 2 shorts, the total price or option premium you receive is $4 + $4 = $8 (net credit).

Payoff function for Short Strangle Option Trading

Here is the payoff function for Short Strangle Option without the price being considered:


Now, let's add them up together to get the NET ORANGE colored payoff function of Short Strangle Option - note that price is still not considered:


Finally, let's make the adjustment for the net price of $10 you paid to construct this Short Strangle Option and here we get the PINK colored final net payoff function for Short Strangle Option with price factored in:

The above PINK colored graph tells us the following:

- The profit region of the above Short Strangle example a flat region (indicated by PINK colored graph above horizontal axis)

- The loss region of the above Short Strangle is a linearly declining region on both sides (indicated by Pink colored graph going down on either side, below the x-axis)

- The profit region is limited and small

- The loss region is comparatively large in magnitude and is on either side

To understand this better, you can also check the Video Tutorial for Short Strangle Option Trading

If you don't want Short Strangle - then there is a similar scenario option trading position which the option trader can take Short Gut Options Trading: Example
OR you can also go for Short Straddle Options Trading

Want to trade in a reverse scenario where a big price movement is expected? Go for Long Strangle Options Trading Explained: Example

Let's now head on to next part Tips to Enter & Exit Short Strangle Options Trading Position