Short Strangle
Prerequisite strategies: you must have traded the iron condor and both credit verticals (bull put, bear call) to a written plan, on top of the cash-secured put and covered call. Clear the Level 3 gate first. Next: the short straddle.
Why this structure exists
An option chain prices a range. Everything inside the breakevens is what the market thinks probably will not be crossed, and the credit is the rent it pays for taking the other side. A short strangle is the cleanest way to collect that rent: sell one call above the range, one put below it, hold nothing else, and let time do the work.
Every defined-risk version of that view spends part of the rent on protection. The iron condor is exactly this trade with two long wings bolted on. Buying a 9,800 call and an 8,300 put against the same short strikes costs £309.94, or 35.7% of the credit; in exchange it converts an unbounded loss into £1,942.51 and cuts buying power from £9,000 to £1,942.51, a 78.4% reduction. At settlement after the 20% gap modelled below, the wings save £10,690.06 of the loss.
So why not just do that instead? For almost everyone reading this, you should. The case for removing the wings is narrow and arithmetic. The wings are the most over-priced part of the chain — you buy the strikes skew makes expensive, to insure a scenario the same skew says is already priced. And a strangle can be defended: with no long legs in the way, the short strikes can be rolled toward the money, out in time, or through each other, where a condor's wings pin you.
What you buy with all that is one number. The condor's worst day is £1,942.51 and you know it before you click. The strangle's worst day is whatever the market decides, and you find out on the morning it happens.
Construction
| Leg | Buy / Sell | Quantity | Strike rule | Expiry rule | Target delta | Price |
|---|---|---|---|---|---|---|
| Call | SELL (credit) | 1 contract = £10 per index point | First listed strike at or beyond 16 delta above spot | 30–60 DTE; never a weekly | 0.15–0.16 | 39.62 pts = £396.18 |
| Put | SELL (credit) | 1 contract, same expiry | First listed strike at or beyond 16 delta below spot | Same expiry as the call | −0.16 to −0.17 | 47.13 pts = £471.25 |
| NET | Net credit | 1 strangle | 8,550 put / 9,550 call, 9,000 spot | 45 days | +0.02 (+£0.16/pt) | 86.74 pts = £867.43 |
ICE lists FTSE 100 exercise prices in intervals of 25, 50, 100 or 200 points, so the 16-delta strikes round to 8,550 and 9,550 — 450 and 550 points out, or −0.89 and +1.09 standard deviations. Equal deltas are not equal distances: in this flat-volatility model the put lands nearer the index, while on a real chain put skew usually pushes it further out and lifts its premium. Four hard inequalities before the order goes in:
Formulas: max profit = (net credit × multiplier) − opening costs, on any settlement between the strikes. Breakevens = put strike − credit, call strike + credit. Loss = (distance beyond the breached strike − net credit) × multiplier, unbounded either way.
The plateau sits barely above the zero line while the tails run off the bottom of the frame — the trade, drawn to scale. The dashed line is the position today: it touches zero at 9,000 and lies below the payoff everywhere, because a short strangle is worth nothing until time has passed. Both curves assume flat 16% volatility; in a real fall it rises and drags the dashed left half lower still.
Entry criteria
| Gate | Rule | Reason |
|---|---|---|
| IV rank / percentile | IVR ≥ 30 and IV percentile ≥ 30 | You are short £154.64 of vega per volatility point. Selling a cheap strangle is the commonest way to lose on a correct range call |
| Term structure | Front month at or above the second month | Contango means you are selling the cheap end of the curve while the risk sits in your expiry |
| Skew | 25-delta put IV minus 25-delta call IV inside its own 12-month range | Extreme skew means the market is already paying for the crash you are about to underwrite — and it is the put side that will be tested |
| Days to expiry | 30–60, closed at 21 | Theta per day barely rises from 45 DTE to 21 DTE (£27.38 to £23.21) while gamma at a tested strike nearly doubles. The last three weeks are unpaid risk |
| Strikes | 16 delta each side, both listed, both breakevens beyond ±1 SD | Below 16 delta the credit stops covering the round trip; above it the band is narrower than the one the chain is already pricing |
| Liquidity | Spread ≤ 5% of the strangle mid; open interest ≥ 250 on both legs | You must be able to close in a panic. ICE UK single-stock series routinely fail this by a wide margin |
| Event calendar | No MPC decision, US CPI print, index review or quarterly roll inside the window | A strangle is short exactly the thing an event delivers |
Do not enter if: IV rank is below 30; the initial requirement exceeds 5% of net liquidation value; a 20% gap would cost more than 10% of net liquidation value (here, £135,920 of account for one contract); you already hold short premium in a correlated underlying, because in a volatility event they are one trade and not two; or you cannot state, in pounds and before clicking, the margin requirement after that gap.
Greeks at entry and how they evolve
| Greek | Entry, 45 DTE, 9,000 | 22 DTE, unchanged | 7 DTE, unchanged | +1 SD (9,505.6, IV 14%) | −1 SD (8,494.4, IV 20%) |
|---|---|---|---|---|---|
| Delta (£ per point) | +0.16 | +0.22 | +0.06 | −4.61 | +4.65 |
| Gamma (£/pt per 100 pts) | −0.97 | −0.84 | −0.19 | −0.93 | −0.84 |
| Theta (£ per day) | +27.38 | +23.75 | +5.39 | +22.87 | +32.49 |
| Vega (£ per vol point) | −154.64 | −65.48 | −4.73 | −144.34 | −150.02 |
| Position mark | £867.43 | £257.97 | £9.10 | £1,697.91 | £2,762.12 |
Black–Scholes, 16% implied volatility unless stated, 4% rates, 3.5% index dividend yield, per one £10-a-point contract. Signs are for the short position.
The 7-DTE column is the most misleading number on this page. It says gamma has collapsed to −£0.19 — true, but only while the index sits 450 points from a strike. Move the index to the 8,550 put at 22% volatility and gamma at 7 DTE is −£1.53, 1.58 times the entry figure; at 2 DTE, −£2.63. A further 3% fall from a tested strike costs £1,472.54 at 45 DTE and £1,739.81 at 7 DTE, against a much smaller remaining credit. That is the character flip: inside the band you run a slow theta business; the moment the index reaches a strike in the final fortnight you run a leveraged directional position you never chose. Vega decides whether you win, gamma what losing costs.
FTSE 100 at 9,000, implied volatility 16%, 45 days to run
The ICE FTSE 100 index option is worth £10 per index point (£90,000 of notional at 9,000), is European style so it cannot be exercised early, settles in cash against the Exchange Delivery Settlement Price, ticks in 0.5 points (£5), trades 08:00–16:50 London and, on the third Friday, stops trading as soon as reasonably practicable after 10:15. One standard deviation over 45 days at 16% is 505.6 points.
The trade: sell 1 × FTSE 100 8,550 put and 1 × FTSE 100 9,550 call, same expiry.
Branch A — the target fires. The strangle marks 43.37 points, reached at 28 DTE with the index unchanged and volatility flat.
Branch B — the put is tested. FTSE 8,550 with 30 days left, IV up to 20%.
Branch C — the gap. FTSE opens 7,200, down 20%, IV 45%, 45 days still to run.
Branch D — held to settlement at an EDSP of 9,140. Both legs finish out of the money and the full £863.43 is kept. Cash settlement means no delivery, no assignment notice and no stamp duty.
On an ICE UK single stock instead the structure fails on size. A BP strangle at 530p, 45 days and 26% implied volatility — 480 put at 3.19p, 580 call at 4.35p — collects 7.54p × 1,000 shares = £75.40. The series are physically delivered and American style, so assignment on the put means buying 1,000 BP shares for £4,800 plus £24.00 of SDRT, and it can arrive early, before an ex-dividend date. A 10% bid-ask, normal on a thin UK chain, costs £15.08 round-trip — 20% of the credit. The short strangle is a UK index trade, or it is not a UK trade at all.
On a US underlying the gain is still computed in sterling, and the two FX legs are struck on different dates. A $1,000 credit at GBP/USD 1.3552 fixes £737.90 of proceeds at the grant date; buying it back for $500 with the rate at 1.3000 costs £384.62 rather than the £368.95 an unchanged rate would have given. Dollar profit 50%; sterling profit £353.28, 47.9%. Currency is a short leg you did not price.
This is a single, hand-picked, favourable scenario. It is not a typical or expected outcome. Every premium is modelled from Black–Scholes at the stated inputs rather than taken from a live chain, and 9,000 is an illustrative round number. Real fills are worse. Past performance, including any illustrative example shown here, is not a reliable indicator of future results.
Management and adjustment
| Trigger | Diagnosis | Action | Do NOT do this |
|---|---|---|---|
| Net delta beyond ±£2.00 a point | Gamma has turned a range trade directional | Roll the untested strike toward the money for a net credit. In Branch B, 9,550 call → 8,950 for +£557.42 | Roll the tested strike away. That buys back your loss at the worst available price and widens the thing that is hurting you |
| Tested strike breached, more than 21 DTE left | Defensible if the arithmetic permits | Roll the whole strangle out in time for a credit: close the 30-DTE position at £1,985.95 and sell the 65-DTE 8,300 / 9,300 for £2,360.38 — a net £374.43 credit | Roll out for a net debit. Duration multiplies vega, so the next volatility spike costs more than this one did |
| Untested side already worthless, still tested | Nothing left to roll conventionally | Invert, but only if total credit collected > inversion width × £10. Rolling the 9,550 call to 8,400 pays £2,739.11, total credit £3,606.54 against a 150-point inversion worth £1,500 — passes, profit zone 8,189.3 to 8,760.7, max profit £2,106.54 | Invert without doing the arithmetic. If credit ≤ width × £10 the inverted position cannot profit at any settlement |
| Loss reaches 200% of credit (£1,734.86) | The trade has failed on its own terms | CLOSE. Both legs, one order, at market if the spread allows | Add contracts to "average the credit". Doubling into short gamma is how accounts end |
| Implied volatility expands after entry | A vega loss (−£154.64 a point) that is not yet a delta loss | Hold if delta is inside the band and the stop is intact. Richer options also make every roll pay more | Panic-close on the vega mark alone. At −1 SD the marks show −£1,898.69 while expiry P&L is still +£307.25 |
| Implied volatility collapses after entry | The thesis paid, early | Take the 50% target the day it appears, whatever the DTE | Hold for the remaining theta. You would be collecting £27 a day against an unbounded tail |
| Underlying gaps through a strike | Undefendable | CLOSE at the open. Size the loss, do not price the hope | Anything else. Every adjustment at a gap is a larger position wearing the word "defence" |
| 21 days to expiry reached | Gamma at a tested strike is about to double | Close, or roll the whole strangle to the next monthly for a credit | Carry it into expiry week for the last £200 |
| Margin usage > 50% of net liquidation value | The broker is now managing the position, not you | CLOSE enough contracts to get back under 25% | Wait for the margin call. Forced liquidation happens at the worst prices of the day |
ROLL WHEN the index is still inside the band or has only just left it, more than 21 days remain, and the roll goes through for a net credit. ROLL TO either a new strike in the same expiry or the same strikes in a later one — never both in one order, or you will not know which decision worked. DO NOT ROLL a credit position for a net debit, ever. And the rule nobody writes down: when the mark-to-market loss reaches twice the credit, or defending would push buying-power usage above half of net liquidation value, or the move arrived as a gap rather than a drift, the correct action is to close, not to adjust. Defence has a budget and it is the credit you were paid. Past that, every "adjustment" is a new and larger short-premium position opened at the worst moment of its own cycle, financed by refusing to book a loss already taken.
Exit rules
If all four are silent, do nothing and check net delta tomorrow. "Nothing" costs £0.97 of gamma per 100 points.
Margin and broker reality
A cash account cannot hold this, and neither can an ordinary margin account without uncovered-option permission. In practice you also want portfolio margin, and Interactive Brokers UK requires USD 110,000 of net liquidation value to upgrade an existing account, restricting margin-increasing trades below USD 100,000. That figure — roughly £81,169 at 1.3552 — is the real gate, and even at it, one contract on the schedule below is 12.2% of the account.
The figures use the Cboe strategy-based schedule for uncovered broad-based index options, because it is published and you can recompute it: 100% of option proceeds plus 15% of the underlying index value less any out-of-the-money amount, to a minimum of proceeds plus 10% of the index value for a call, or proceeds plus 10% of the exercise price for a put; and for a short call plus short put, the greater of the two requirements plus the option proceeds of the other side. Maintenance substitutes current market value for entry proceeds, which is why the requirement rises automatically as the options you sold get dearer. IBKR margins the ICE FTSE 100 series on a risk-based model rather than this schedule, so your own order preview governs; the direction of travel does not change.
Liquidity is a margin-equivalent cost. The ICE FTSE 100 chain is the only UK-underlying options market deep enough for this structure; the £15.08 round-trip spread on the BP strangle above is one fifth of its credit, before a single tick of market risk.
Stress test
| Scenario (move at once, 45 DTE left) | Index | Mark-to-market P&L | P&L if held to expiry | Maintenance margin |
|---|---|---|---|---|
| −2 SD, IV 26% | 7,988.8 | −£5,756.36 | −£4,748.93 | £18,602.94 |
| −1 SD, IV 20% | 8,494.4 | −£1,898.69 | +£307.25 | £15,503.69 |
| Unchanged, IV 16% | 9,000.0 | −£4.00 | +£863.43 | £9,867.43 |
| +1 SD, IV 14% | 9,505.6 | −£834.48 | +£863.43 | £15,512.51 |
| +2 SD, IV 13% | 10,011.2 | −£4,126.18 | −£3,748.93 | £20,006.46 |
| −20% gap, IV 45% | 7,200.0 | −£13,592.04 | −£12,636.57 | £25,255.47 |
One standard deviation over 45 days at 16% implied volatility is 505.6 points. Implied volatility is stepped up on down moves and down on up moves to reflect equity index skew; that asymmetry is why −1 SD costs £1,064 more on the marks than +1 SD despite being the same distance.
Two rows deserve reading twice. At −1 SD the marks show −£1,898.69 while the same index level at expiry pays +£307.25 — the whole difference between a position and a payoff, and the reason a one-times-credit stop would take you out of a trade that was going to win. At the gap, the requirement rises to £25,255.47 in the same instant equity falls by £13,592.04: margin is pro-cyclical, and the account is squeezed from both ends at once. On 19 October 1987 the FTSE 100 fell 10.8% and a further 12.2% the next day, 21.7% across two sessions; on 12 March 2020 it fell 10.9% in one. A 20% gap is not the tail of this distribution, it is the part that has already happened. So size for the row you have not modelled: if a −20% gap across the whole short-premium book would cost more than 10% of net liquidation value, the book is too big — and the independence you assumed between "uncorrelated" underlyings vanishes on exactly the day you were relying on it.
roll the untested side, never the tested one AND every roll must be executed for a net credit. If neither side can be rolled for a credit you do not have an adjustment. You have a loss, and the only question left is what size you take it at.What to trade instead
Simpler, from the tier below: the iron condor is this trade with wings. It gives up £309.94 of the £867.43 credit, caps the loss at £1,942.51 and cuts buying power by 78.4% — so the same £9,000 funds 4.6 condors, and all of them together still lose less in the gap than one strangle does. It collects 28.7p of credit per pound of buying power against the strangle's 9.6p. For nearly every UK retail account it is the correct expression of the same view, and being boring is the feature.
Narrower, at this tier: the short straddle moves both strikes to the money, collecting £4,015.36 for £13,500 of buying power — 29.7p per pound against 9.6p — and pays for it with a modelled 57.3% chance of profit against this trade's 75.1%, on a band of ±0.79 standard deviations against −1.06 to +1.26. Take it for capital efficiency, never for the odds.
Asymmetric, at this tier: the jade lizard replaces the naked short call with a call spread financed by the put's credit — the only version of this family where "no risk to the upside" can be proved arithmetically before entry.
Risk statement
Uncovered options are among the highest-risk instruments available to a retail client: losses are not limited to the amount invested, can exceed the account balance, and the broker may liquidate without notice at the worst prices of the day. This is educational material about mechanics, margin and UK tax treatment, not a recommendation to trade the FTSE 100 or anything else, and it takes no account of your circumstances. Every figure is modelled rather than quoted. If your trading is frequent enough to raise the investor-versus-trader question, that is one for a qualified adviser.