WhooL !

• Sell a put, Strike Price A
• Sell a call, Strike Price B
• Generally, the stock price will be between Strikes A and B
   

A short strangle gives you the obligation to buy the stock at Strike Price A and the obligation to sell the stock at Strike Price B if the options are assigned. You are predicting the stock price will remain somewhere between Strike A and Strike B, and the options you sell will expire worthless.
 
By selling two options, you significantly increase the income you would have achieved from selling a put or a call alone. But that comes at a cost. You have unlimited risk on the upside and substantial downside risk. To avoid being exposed to such risk, you may wish to consider using a iron condor instead (Play Twenty-Six).
 
Like the short straddle (Play Ten), advanced traders might run this play to take advantage of a possible decrease in implied volatility. If implied volatility is abnormally high for no apparent reason, the call and put may be overvalued. After the sale, the idea is to wait for volatility to drop and close the position at a profit.
 

You may wish to consider ensuring that Strike A and Strike B are one standard deviation or more away from the stock price at initiation. That will increase your probability of success. However, the further out-of-the-money the strike prices are, the lower the net credit received will be from this play.
 

BREAK-EVEN AT EXPIRATION

There are two break-even points:

• Strike A minus the net credit received.
• Strike B plus the net credit received.

THE SWEET SPOT

You want the stock at or between Strikes A and B at expiration, so the options expire worthless.
 

MAXIMUM POTENTIAL PROFIT

Potential profit is limited to the net credit received.
 

MAXIMUM POTENTIAL LOSS

If the stock goes up, your losses could be theoretically unlimited.
 
If the stock goes down, your losses may be substantial, but limited to Strike A minus the net credit received.
 

MARGIN REQUIREMENT

See Appendix A for margin requirement.
 

AS TIME GOES BY

For this play, time decay is your best friend. It works doubly in your favor, eroding the price of both options you sold. That means if you choose to close your position prior to expiration, it will be less expensive to buy it back.
 

IMPLIED VOLATILITY

After the play is established, increasing implied volatility is your mortal enemy. It works doubly against you by increasing the price of both options you sold. That means if you wish to close your position prior to expiration, it will be more expensive to buy back the options.
 
An increase in implied volatility also suggests an increased possibility of a price swing, whereas you want the stock price to remain stable between Strike A and Strike B.