COVERED STRANGLE
Overview
Own 100 shares and simultaneously sell both an OTM call and an OTM put. You collect more premium than a standard covered call, but the short put obligates you to buy another 100 shares if the stock falls to the put strike, doubling your downside exposure.
What it does
You supercharge a covered call by also selling a put below the stock price. The extra put premium increases income but adds significant risk — if the stock falls to the put strike, you're obligated to buy another 100 shares at assignment, doubling your position in a declining stock.
Structure
buy 100 stock + sell 1 call + sell 1 put
Setup
- 1.Own 100 shares of stock.
- 2.Sell 1 OTM Call above the current price.
- 3.Sell 1 OTM Put below the current price.
- 4.Use the same expiration for both options.
- 5.Reserve cash equal to the put strike × 100 in case the put is assigned.
Max profit
(Call Strike − Stock Cost + Total Premium Received) × 100. Achieved when shares are called away.
Max loss
Substantial and uncapped below zero after put assignment (you'd hold 200 shares in a losing position).
Breakeven
Stock Cost − Total Premium (single lot). Effective average cost is more complex if the put is assigned.
When to use
When you're neutral to mildly bullish on a stock you own and want to maximize premium income in a range-bound environment.
When to avoid
If you cannot afford to buy another 100 shares at the put strike or the stock has significant downside risk.
Example trade
Own 100 shares AAPL at $175 Sell 1 AAPL $185 Call at $3.50 Sell 1 AAPL $165 Put at $3.00 Total credit: $6.50 ($650) Expiration: 30 days If AAPL stays between $165 and $185: Keep $650, still own shares If AAPL rallies to $190: Shares called at $185; profit = ($185-$175+$6.50)×100 = $1,650 If AAPL falls to $160: Assigned on put, buy 200 shares total; significant unrealized loss
Common mistakes
- ×Not reserving cash for put assignment — getting forced to hold 200 shares without adequate capital.
- ×Using this on high-volatility stocks where both strikes are easily breached.
- ×Treating the enhanced premium as 'free money' without accounting for doubled downside risk.
- ×Choosing put and call strikes too close to the stock price, leaving no room for normal fluctuation.
- ×Ignoring earnings or events that can cause the stock to breach both strikes simultaneously.
FAQ
Can I use this strategy to lower my cost basis?
Yes — both premiums reduce your effective cost basis in the stock. But be aware that assignment on the put doubles your position in a falling stock.
What if both options are assigned?
Technically impossible simultaneously — if the call is assigned, your shares are called away before the put can cause a second assignment.