The Covered Short Strangle is the ‘Kissin Cousin’ to last week’s strategy, the Covered Short Straddle.The Covered Short Strangle is also a high risk limited reward strategy.  However it is somewhat less risky than its counterpart.  The difference between the two is that the Covered Short Strangle’s long options are placed OTM at different strikes.  In a bullish move, the position will allow for more stock appreciation than the Covered Short Straddle and the short put is further away from price so it is more likely to expire worthless.  The risk graph is almost identical to the Covered Short Straddle.  One could think of the position as an OTM Covered Call with an added OTM naked short put.

Review the risk graph and you should gain understanding of the risk and reward of the position.  Best, Robin

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