How a Covered Strangle Can Greatly Enhance Your Return


How a Covered Strangle Can Greatly Enhance Your Return

Several weeks ago, I wrote about short strangles and how they offer investors one of the highest-probability strategies on the market. If managed correctly, short strangles are an incredible strategy. But the capital required can be steep, so most investors shy away. Plus, the thought of being naked on both sides of a trade (call and put) can potentially lead to a few sleepless nights—that is, if managing risk is an afterthought.

But hey, we all see ourselves as risk managers first and traders second, right? So, short strangles are well within our wheelhouse.

Placing trades is easy; it’s knowing when to hold ’em and fold ’em that separates traders/investors that fall on their face from those that continually trend their accounts higher over the long-term.

But I digress.

A short strangle is an undefined risk option strategy that benefits when the asset of your choice stays between your short call and short put strike. In most cases, it’s a neutral strategy with a large price range for the underlying stock to move around in. At least, that’s the way I use short strangles.

A covered strangle, on the other hand, offers an investor a completely different type of high-probability opportunity. A covered strangle is simply a covered call strategy coupled with a short put–or just buying a stock and wrapping a short strangle around it. Either way, it’s a covered strangle.

Investors want to use a covered strangle when they wish to enhance the returns on a long position (stock or ETF) by two to four times, while also having the opportunity to buy even more shares at a price of their choosing. It’s a great income strategy to use on stocks you already own or wish to acquire.

But, let’s go through an example to really get down to the nitty-gritty of how a covered strangle works.

Apple (AAPL) – Covered Strangle

I’m going to keep it simple by using tech behemoth Apple (AAPL) for our covered strangle example.

With AAPL trading for 153.06, we are going to buy 100 shares for $15,306.


Once we’ve purchased at least 100 shares we then will sell a delta neutral short strangle around the shares. Since AAPL is trading for roughly 153, we will look to sell a short strangle that has a delta of roughly 0.10 to 0.30 for both the call and put. Moreover, I will look to go out 20 to 50 days. My preference is to go with a shorter duration for my short strangle, but the amount of premium I can bring in will define my choice of expiration cycle.

Here are our choices for expiration cycles. I’m going to use the October 15, 2021 expiration cycle with 46 days left until expiration.


Once I’ve chosen my expiration cycle, I then must decide which strikes I wish to use for my short strangle.

In most cases, I want to sell a short strangle that has an 80%+ probability of success, or a delta of roughly 0.20 or less.

On the call side:


We can sell the 165 call strike for roughly $1.26. The 165 call strike has a probability of success of 83.16%, or a delta of 0.19.

On the put side:


We can sell the 135 put strike for roughly $0.80. The 135 put strike has a probability of success of 87.76%, or a delta of 0.10.

The Trade


  • Sell out-of-the-money call
  • Sell out-of-the-money put

Sell to open AAPL October 15, 2021 165 call

Sell to open AAPL October 15, 2021 135 call for a total credit of $2.06

Premium Return: $2.06 ($1.26 for the call + $0.80 for the put)

Breakeven Price: 151.00

Maximum Profit Potential: $1,400 ($165 short call strike – $151.00 breakeven)*100

A Few Possible Outcomes

Stock Pushes Above Short Call Strike

If Apple pushes above the 165 short call strike, no worries, we get to keep the put premium of $0.80, the call premium of $1.26 and we make roughly $12 on the stock. Overall our gain would be $1,400, or 9.15% over 46 days.

Stock Stays Within the Range of 135 to 165

If Apple stays between our short put and short call we get to keep the entire premium of $2.06, or 1.35% over 46 days. We can use the covered strangle strategy roughly seven more times over the course of the year for a total annual return (just premium) of approximately 10.8%.

Stock Pushes Below our Short Put Strike

If Apple pushes below our short put strike of 135 we still get to keep our overall premium of $2.06. But we would be issued 100 shares of stock for every put sold. Our breakeven on the newly issued shares would be $132.96, a discount of 13.13%.

To sum up a covered strangle options strategy, if you wish to enhance a stock position, like AAPL, consider this often overlooked but highly flexible covered strangle. You start with the same exposure as a long stock and have protection if the stock moves above or below the stock price. And again, if the stock stays between the short put and short call, you will be rewarded with significantly more premium than with a standard covered call.

As always, if you have any questions, please feel free to email me or post your question in the comments section below.


7 comments on “How a Covered Strangle Can Greatly Enhance Your Return

  1. Parker Adams on

    You said:

    Stock Pushes Below our Short Put Strike
    If Apple pushes below our short put strike of 135 we still get to keep our overall premium of $2.06. But we would be issued 100 shares of stock for every put sold. Our breakeven on the newly issued shares would be $132.96, a discount of 13.13%.

    Question: Does this mean that in the worst case scenario I would have to buy 100 shares of AAPL at the effective price of $132.96 per share?

    • Andy Crowder on

      Parker, thanks for the question. You could always buy back the short puts prior to expiration. But, yes, you would be issued 100 shares for every put sold. Just remember, this is NOT the worst case scenario because we are using the strategy with the potential to buy more shares at a discounted price. you could simply use a covered call strategy if you wish not to sell puts and potentially be issued shares. I hope this helps.

  2. Lewis on

    Is there a way to calculate the probability of profit of a covered strangle as one trade OR is it not needed because of the selection of the strikes and associated probability of expiring out-of-the-money of the short call and short put?
    The reason I ask is that I think of this setup as one trade even though it has three parts – the stock, short call, and short put. It would seem to be a difficult math problem, but I may be making this more complicated than it needs to be.

  3. Juan Pedro Ruiz Guerrero on

    Yes, but you fail to mention the risk which is;
    If the price goes below your short put price, you will be issued shares at the market price (which could be well below the strike price) and you also own 100 shares at the price you first purchased. So in your example, you purchased 100 shares @ $153 (more or less), so you´ve shelled out $15,300. On expiration (or before, as per the US model), the price drops to (let´s be conservative) $134 ($1 below your strike price). You´re issued 100 shares at that price, so you´re now out $13,400 in addition to the $15,300, for a total of $28,700. But that´s assuming you have enough margin and cash to absorb the new 100 shares. So you got $206 from your stangle, so you effectively purchased the new shares at $13,194. While there is an 80% probability this won´t happen, it could and traders have to understand that risk and have the financial wherewithal to absorb it. Additionally, if the price goes below your strike price, it most probably means that market is experiencing a significant drop and you don´t know with certainty (even as a chartist) when the price will stabilize, further increasing your theoretical loss (no actual loss until you sell). And yes, you could sell the shares as soon as you´re assigned for a loss (in this case) of $15,300 – $13,400 (assuming you sell at the same time you´re assigned without a further significant drop in prices) = $1,900 AND $13,500 – $13,400 (strike price – sale price at assignment time) = $100, for a total of $2,000 (plus commissions, if any, and fees). Of course, you could always buy back your put before expiration, but you could be assigned at any time before then. I hope I got this right. Please let me know if I misunderstand and thanks for your posts.

    • Andy Crowder on

      Juan, thanks for the question. As stated in the article, by selling the short and using a covered strangle you have no problem acquiring more shares in the underlying stock or ETF. So, you are not “out” the required capital needed to own the additional 100 shares. Also, position-size should always be a priority before placing a trade, so you should have a full understanding how much capital will be allocated to your position prior to making the trade. If you don’t have the capital, don’t make the trade. Even if t goes beyond your state position-size, don’t make the trade. Risk-management is always the priority, think of yourself as a risk-manager first, trader second. Never the other way around. Selling premium will continue to lower your cost basis and you can always just sell calls against your shares (covered call) if you wish not to acquire more shares. Again, this will continue to lower your cost basis. However, if you hit a level where stop-losses trigger then you can simply get out of the trade. I hope this helps. Thanks again for the question.

    • Andy Crowder on


      Thanks for the kind words. In most cases I would handle it the same way, but it depends on the broker and the limitations. Brokers like Tastytrade and a few others, that understand the true risk associated with each strategy, don’t have an issue with poor man’s covered calls. If one can’t use a PMCC, then using covered calls is the second best, but as I’m sure you are aware the cost per position is significantly higher, thereby defeating the purpose of using a PMCC. I hope this helps.


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