📚 Educational Corner: Options Deep Dive - The Covered Strangle

🎓 Topic of the Week: The Covered Strangle

In the world of options, some strategies stand out for their high probability of success and strong returns. The short strangle is a well-known approach that benefits from an underlying asset’s price remaining within a certain range. However, the risk of naked options positions can be substantial. That’s where the covered strangle steps in—a strategy designed to enhance returns while keeping risk manageable.

Let's dive into how the covered strangle works, why it might be a solid addition to your portfolio, and how to implement it effectively.

🔎 What Is a Covered Strangle?

At its core, a covered strangle combines a long stock position with two option positions:

✅ Selling an out-of-the-money call (covered call)
✅ Selling an out-of-the-money put (short put)

Unlike a traditional short strangle, the presence of a long stock position reduces downside risk. This strategy allows investors to:

✔️ Generate additional income from stocks they already own (or want to own).
✔️ Potentially acquire more shares at a discount if the stock declines.

By using a covered strangle, traders can double or even quadruple the return on a standard buy-and-hold stock position. Let’s break it down with an example.

📈 A Real-World Example: Nvidia (NVDA)

Let’s assume Nvidia (NVDA) is trading at $139, and you buy 100 shares for $13,900. Now, you apply the covered strangle:

Step 1: Choosing Expiration and Strikes

To balance risk and reward, we select options with deltas between 0.10 and 0.30, maximizing the chance of expiring worthless. A 20–50 day expiration window is typically ideal.

For this example, let’s use the April 4, 2025 expiration (47 days out):

📌 Sell the $170 call for $2.25 (Delta: 0.18, 90% chance of expiring worthless)
📌 Sell the $115 put for $2.10 (Delta: 0.15, 77% chance of expiring worthless)

Step 2: Executing the Trade

🔹 Sell the $170 call for $2.25
🔹 Sell the $115 put for $2.10
🔹 Total premium collected: $4.35 ($435 per contract)

If NVDA stays between $115 and $170, both options expire worthless, and you keep the full premium as profit.

🔍 Understanding the Potential Outcomes

📊 Outcome 1: Stock Moves Above the Call Strike ($170+)

• The call is exercised, and you sell your stock at $170.

• Profit from stock appreciation: $31 per share ($3,100 total)

• Option premium collected: $435

• Total profit: $3,535 (25.4% return on capital in 47 days!)

📊 Outcome 2: Stock Stays Between $115 and $170

• Both options expire worthless ✅

• You keep $435 in premium

• Return: 3.1% in 47 days (Annualized ~21.7%)

📊 Outcome 3: Stock Moves Below the Put Strike ($115)

• The put is exercised, and you buy 100 more shares at $115.

• Your effective price per share drops to $110.65 ($115 - $4.35 premium).

• This represents a 27.6% discount on the stock compared to your initial purchase price.

🚀 Why Use a Covered Strangle?

The covered strangle is a versatile and high-probability strategy that:

✅ Boosts income by collecting more premium than a standard covered call.
✅ Outperforms buy-and-hold strategies in range-bound markets.

However, it’s crucial to manage risk effectively, as extreme price movements can still lead to assignment and additional capital commitments.

🎯 Final Thoughts

The covered strangle is a powerful income strategy that allows you to maximize returns on stocks you already own. By integrating this strategy into your trading plan, you can:

📌 Generate consistent income
📌 Reduce cost basis on long-term positions
📌 Take advantage of premium decay while managing risk

🔔 Need help implementing this strategy? Have questions? Reply and let me know!

Happy trading,

Andy

📩 Stay tuned for more deep dives in next week’s Educational Corner!

🎯 Ready to Elevate Your Options Trading?
Subscribe to The Option Premium—a free weekly newsletter delivering:
✅ Actionable strategies.
✅ Step-by-step trade breakdowns.
✅ Market insights for all conditions (bullish, bearish, or neutral).

📩 Get smarter, more confident trading insights delivered to your inbox every week.

📺 Follow Me on YouTube:
🎥 Explore in-depth tutorials, trade setups, and exclusive content to sharpen your skills.