Collecting theta with a short strangle

Question

The stock is at \100. You sell the 95-strike put and the 105-strike call (same 30-day expiry), collecting \3 total premium. Where do you make money at expiry, what greeks are you running, and what's the risk?

Accepted Answer

Payoff at expiry. You keep the full \3 as long as the stock lands between the strikes, 95 \le ST \le 105 (both options expire worthless). Outside that band you start giving premium back. The break-evens are one premium beyond each strike: 95 - 3 = \92 \quad	ext{and}\quad 105 + 3 = \108. You profit if ST \in (92, 108), with maximum profit \3 anywhere in [95,105], and losses growing linearly (unbounded on the upside, large on the downside) past the break-evens. The greeks. A short strangle is: - Long theta, every quiet day, both options decay and you keep more of the \3. This is your income. -…

Collecting theta with a short strangle

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