It’s favored by beginners for its simple structure and the way it limits risk to the premium paid, while offering the potential for gains if the asset makes a big move up or down.
Traders can expect varied results based on volatility, with profits possible during strong price swings and limited losses in flat markets.
| Market | Stocks, ETFs, index options |
|---|---|
| Timeframe | Daily to expiration (options typically held from days to weeks) |
| Indicators | Implied volatility, price charts (no strict technical indicators required) |
| Style | Volatility, breakout, non-directional |
| Skill level | Beginner |
| Typical holding time | Swing (days to weeks) |
| Risk per trade | 100% of the combined option premium paid |
How It Works
- Buy one out-of-the-money (OTM) call and one OTM put with the same expiration date but different strikes.
- Pay a net premium (maximum risk) upfront for both options.
- Profit if the asset moves sharply above the call strike or below the put strike by more than the cost of both options.
- This strategy is designed to capture large price moves in either direction, not small fluctuations.
- The edge comes from exploiting anticipated volatility events where the market is likely to move strongly, but the direction is uncertain.
The approach works best during earnings releases, economic reports, or before expected news events where price swings are more probable.
Strategy Rules (Step-by-step)
Setup:
- Volatility Assessment: Confirm an upcoming catalyst (earnings, Fed announcement) increases the chance of a significant price move.
- Option Selection: Select the same expiration date, at least 1–3 weeks out, for both call and put.
- Strike Selection: Choose OTM strikes: typically, the first OTM call and the first OTM put equidistant from current price, or use delta 15–20 options for each side.
Entry:
- Simultaneously buy one call and one put at the chosen strikes with the same expiration.
- Enter via limit order at or below mid-market price to reduce slippage.
- Preferred entry is 2–7 days prior to the expected volatility event to avoid excessive time decay.
Stop-loss:
- Maximum risk is the total premium paid (cannot lose more).
- Optional: Close both legs early if the combined value falls to 30–40% of purchase price, or if the underlying doesn’t move as expected post-event to avoid further time decay.
- Set a mental stop-loss based on a percentage loss of premium (e.g., accept a 60% loss of total premium as the exit point).
Take profit:
- Place profit targets at 50%, 100%, and 200% of premium paid.
- If underlying asset breaks out sharply, close both options for combined profit or keep the profitable leg (sell the unprofitable one to recover part of premium).
- Use trailing stop on the winning leg to capture extended moves while limiting giveback.
Trade management:
- Consider closing before expiration to avoid rapid theta decay in the final days.
- If one leg doubles in value and the other is nearly worthless, lock profits or adjust to a “free trade” by selling the losing leg and holding the winner.
Settings and Parameters
- Indicator settings: No mandatory indicators; monitor implied volatility and news calendar.
- Timeframes tested: Options held for 2–14 days is common for pre- and post-event trades.
- Assets tested: Highly liquid equities (AAPL, TSLA, SPY), index options (SPX, QQQ), optionally crypto options (BTC, ETH for advanced users).
- Session/Hours: U.S. market hours (9:30 am–4:00 pm ET), enter trades before market-moving events are scheduled.
When It Works vs. When It Fails
Works best:
- Markets expecting significant volatility (earnings, data releases, major news).
- Times when implied volatility is not excessively overpriced relative to realized volatility.
- Assets prone to unpredictable swings (Tesla, biotech, post-merger stocks).
Struggles:
- Choppy, range-bound markets with low realized volatility after entry.
- Periods of implied volatility “crush” post-event—premiums drop quickly after the event, picking the wrong timing can cause losses even with a sharp move.
- Situations where moves aren’t large enough to exceed the combined premium cost.
Filters to avoid bad conditions:
- Avoid entering just before a large drop in implied volatility (post-event).
- Use an implied volatility percentile scan; avoid strikes with 95th percentile IV unless expected move is extreme.
- Skip trades near expiration/with elevated bid-ask spreads or low liquidity.
Risk Management (Beginner-safe)
- Position sizing: Limit trade size so that max loss (premium) is ≤1% of account balance.
- Max open risk: Do not have more than 2–3 such strangle positions exposure at one time (<2–3% total capital at risk).
- Daily loss limit: Cease new entries after 2R in total losses.
- Fees/slippage note: Wide option spreads can increase cost; always attempt to use limit orders and avoid thinly traded strikes.
Example Trade (Walkthrough)
- Pair/Asset: TSLA (Tesla stock)
- Timeframe: Options expiring 2 weeks out
- Setup snapshot: Tesla reports earnings next week; the stock trades at $700. Implied volatility is in the 80th percentile. Price consolidation for several days before the event.
- Entry: Buy one $720 call at $15 and one $680 put at $13 (both expiring in 2 weeks). Net premium paid: $28.
- Stop-loss: Set mental stop if strangle value drops to $10 (about 65% loss of initial premium), or if the event passes and price barely reacts.
- Take profit: If strangle value increases to $50+ (following a $50 up or down swing post-earnings), close both contracts for +1R or more. Alternatively, if stock jumps to $760, call is deep ITM (worth $40+), and put is nearly worthless—close both or let winning leg run with a tight trailing stop.
- Outcome: Tesla surges to $780 post-earnings. $720 call jumps to $65, put drops to near $1. Exit both options for $66 total = profit of $38 or approx 1.36R. Key lesson: strangles can perform well if the underlying stock moves far enough quickly.
For clarity, include a chart showing the price breakout, the entry, and the exit levels when visualizing this trade.
Pros and Cons
Pros:
- Simple rules and setup—no complex forecasts required.
- Limited risk, known in advance (total premium).
- Profit potential from large moves in any direction.
- No need to pick market direction.
Cons:
- Time-decay and implied volatility drops can erode value quickly.
- Doesn’t work well in flat or slightly moving markets.
- Losses exceed profits if the asset does not move far enough to cover premium.
- Option bid-ask spreads may be wide on illiquid contracts.
Common Mistakes
- Entering with too little time until expiration (excessive theta decay).
- Paying top-dollar for options in high IV environments just before volatility collapses.
- Over-leveraging positions, risking more than 1% per trade.
- Chasing after announcements with no clear volatility catalyst.
- Moving stop-losses based on hope, not on the original risk plan.
- Holding trades after event risk is gone and both legs are decaying rapidly.
Tips and Variations
- Add a higher timeframe filter (e.g., only enter if weekly ATR is elevated).
- Consider using delta-neutral adjustments if asset trends toward one leg.
- For higher probability: enter slightly in-the-money strikes to reduce break-even distance (pay higher premium, but higher chance of profit).
- Alert tools (platform notifications) to monitor upcoming catalysts and IV surges.
- Experiment with scaling out: sell one leg on profit spike, hold the other to expiration if trend continues.
Tools You Can Use
- Charting: TradingView, Thinkorswim, Fidelity Active Trader Pro
- Screeners/Alerts: Optionslam, Market Chameleon, Benzinga Pro event calendar
- Journaling: Edgewonk, TraderSync, Tradervue
- Backtesting: OptionOmega, Cboe’s backtesting tools, Tradier Labs for Python scripting
FAQs
- Does it work on crypto? Rarely, as most crypto options markets have low liquidity and wide spreads, but strategies are transferable to BTC/ETH Deribit for advanced users.
- What timeframe is best? Several days to a few weeks before a volatility event; avoid < 3 days to expiry to reduce decay risk.
- What win rate to expect? Usually 15–35% win rate is normal, but occasional outsized gains cover smaller, frequent losses.
- Can I automate it? Yes, with brokers that offer API trading in options, but automation must handle variable liquidity and event risk.
Glossary
- EMA: Exponential Moving Average (not essential to this strategy but sometimes used for trend context).
- ATR: Average True Range—measures volatility to help choose events/underlyings.
- R-multiple: A measure of profit and loss in terms of risk taken (e.g., 1R = initial premium at risk).
- Drawdown: The amount lost from a peak to the next trough in equity, important for understanding strategy risk.
Disclaimer: Educational only. Not financial advice. Past performance ≠ future results.