Covered Strangle at a glance
| Construction | Buy 100 shares, sell 1 put two strikes below the money, and sell 1 call two strikes above the money, with both options in the front month expiration. |
|---|---|
| Outlook | Bullish |
| Volatility view | Wants falling IV |
| Max profit | Call strike minus stock purchase price plus total premium received, times 100. |
| Max loss | Stock purchase price plus put strike minus total premium received, times 100, if the stock falls to zero. |
| Breakeven | Breakeven = stock purchase price minus total premium received, as long as that level is above the put strike. |
| Experience level | Advanced |
| Also called | Covered combination |
How a covered strangle works
A covered strangle, also called a covered combination, is a covered call plus a short put. The call is covered by the shares you own, while the put is not covered by stock at all, so your broker requires cash or margin to secure it. In effect, you are telling the market you are happy to sell your shares at the call strike or buy another 100 shares at the put strike, and you are paid premium for both commitments. Many investors use it to scale into or out of a position on their own terms.
At expiration there are three zones. Above the call strike, your shares are called away at the call strike and you keep both premiums, so profit is capped. Between the strikes, both options expire worthless, and your result is the stock's gain or loss plus the two premiums. Below the put strike, you are assigned on the put and now own 200 shares, so losses build twice as fast as the stock falls. That doubling is the defining risk of the covered strangle.
Before expiration, positive theta from two short options adds steady income as long as the stock stays between the strikes. Negative vega means a drop in implied volatility helps the option side, while a volatility spike, usually during a selloff, hurts at the same time the shares are falling. Delta starts near +100 because the short put adds roughly what the short call subtracts, then rises toward +200 as the stock falls and shrinks toward zero as it rises past the call strike.
Covered Strangle example with real numbers
With the stock at $100, implied volatility at 30%, a 4.1% risk free rate and no dividend, you would buy 100 shares at $100.00, sell 1 95 put (32 days) at $1.43, sell 1 105 call (32 days) at $1.78. That is a net debit of $9,679. At expiration a maximum profit of $821 and a maximum loss of $19,179, with a breakeven at $96.79. The lognormal chance of profit is 64%.
These are theoretical American option prices from the Bjerksund and Stensland model, not live quotes. Load any ticker in the covered strangle calculator above to run the same math on real market prices.
When to use a covered strangle
- You own the stock, are neutral to mildly bullish, and want more income than a covered call alone provides.
- You would happily buy another 100 shares at the put strike.
- Implied volatility is elevated, making both premiums more attractive.
- You have a target price for selling your shares at the call strike.
Max profit, max loss and breakeven
Maximum profit
Call strike minus stock purchase price plus total premium received, times 100. You earn it when the stock closes at or above the call strike and your shares are called away.
Maximum loss
Stock purchase price plus put strike minus total premium received, times 100, if the stock falls to zero. That is roughly the risk of owning 200 shares, so size the position with both lots in mind.
Breakeven
Breakeven = stock purchase price minus total premium received, as long as that level is above the put strike. If it falls below the put strike, breakeven = stock purchase price plus put strike minus total premium, divided by 2, because both share lots lose below the put.
Covered Strangle Greeks
- Delta: Delta starts near +100, rises toward +200 as the stock falls below the put strike, and falls toward zero as the stock rises above the call strike.
- Gamma: Gamma is negative because both options are short, so the position gets longer as the stock drops and shorter as it rallies.
- Theta: Theta is positive from two short options, adding income every day the stock stays in range.
- Vega: Vega is negative, so rising implied volatility lowers the position's value even if the stock holds steady.
See the live numbers for your position in the Greeks tab of the calculator, or explore a single option in the options Greeks calculator.
Early exercise and assignment risk
The covered call side carries classic dividend risk. If the stock is above the call strike heading into an ex dividend date and the call's time value is smaller than the dividend, the call holder has a reason to exercise early. Your shares are called away before the ex dividend date, so you lose the dividend you expected to collect and are left holding only the short put. That put is now secured by cash rather than paired with stock, which is fine if you planned for it, but it changes your risk profile.
The put side can be assigned early after a sharp decline, when the put is deep in the money with little time value. You then buy another 100 shares at the put strike and hold 200 shares with a single short call covering half of them. Make sure the cash or margin is ready, since an assignment notice can arrive the morning after any trading day. Puts are less likely to be exercised just before an ex dividend date, because the coming price drop benefits put holders, but they become more likely right after it and when interest rates are high.
The calculator's Early exercise risk tab flags short legs that are likely to be assigned. For a single option, use the early exercise calculator or read how early exercise and assignment work.
Pros and cons
Pros
- Two premiums produce more income than a covered call alone.
- Lets you sell shares at a target price or buy more at a discount.
- Positive time decay in a range bound market.
- The call side needs no extra margin because your shares cover it.
Cons
- Downside exposure doubles below the put strike.
- Upside is capped at the call strike.
- Early assignment of the call can cost you the dividend.
- Requires cash or margin to secure the short put.
How to manage a covered strangle
- Size the trade so you can afford 200 shares if the put is assigned.
- Roll the short call up and out if the stock rallies and you want to keep the shares.
- Roll the short put down and out, or close it, if the stock breaks below support.
- Check ex dividend dates and close or roll in the money calls before them if you want the dividend.
Covered Strangle FAQ
What is a covered strangle?
A covered strangle is 100 shares of stock combined with a short out of the money call and a short out of the money put. The call is covered by the shares, and the put is secured by cash or margin. It collects two premiums but doubles downside exposure below the put strike.
Is a covered strangle riskier than a covered call?
Yes, a covered strangle is riskier than a covered call because the short put can add another 100 shares in a decline. Below the put strike, losses grow twice as fast as on a covered call. In exchange, it collects more premium.
What happens if both options in a covered strangle expire worthless?
If both options expire worthless, you keep both premiums and still own your 100 shares. Your result is the stock's gain or loss plus the premium income. You can then sell a new put and call for the next cycle.
When is the call in a covered strangle likely to be assigned early?
The short call is most likely to be assigned early on the trading day before an ex dividend date, when it is in the money and its time value is smaller than the dividend. Assignment means your shares are sold at the call strike and you miss the dividend. The short put stays open.
Related strategies
Covered Call
A covered call is a position that owns 100 shares of stock and sells one call option against them to collect premium.
Cash Secured Put
A cash secured put is the sale of a put option while holding enough cash to buy 100 shares at the strike if you are assigned.
Short Strangle
A short strangle is a neutral options strategy where you sell an out of the money put and an out of the money call on the same stock and expiration to collect premium.
Collar
A collar is a position that owns 100 shares of stock, buys a protective put below the market and sells a covered call above it.
Educational tool, not financial advice. Calculations are theoretical and depend on your inputs; real fills, fees, early assignment and dividends can change results. Options involve risk and are not suitable for every investor.