Best Practices

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Best Practices

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

This segment of Best Practices discusses how we profit from short strangles.

A short strangle is the sale of an out-of-the-money (OTM) put and an out-of-the-money call. Since we are selling a put and a call, we receive a credit. In order to profit, we can buy back the position for less than we sold it for or let the position expire worthless.

If the implied volatility decreases or the underlying prices stays between the strikes of the put and call, the position becomes cheaper.

Strangles also profit from time decay because option values decay with the passage of time. Therefore, time decay, a decrease in implied volatility, and neutral price movement are three ways we can profit from strangles.

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