Calculations Check on $SPY Strangle

External question — Personal Finance Stack Exchange Author: thenewjames Original post: https://money.stackexchange.com/questions/121820 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I'm researching options strategies and I started paper trading a $SPY options. Here's my strategy: Set up a strangle 5% above and below the market price expiring a month from the day of trade. 12 contracts total. On Feb 20th, I looked at the cost of that setup: Actual price of the stock ($SPY) = $336.40 Sell a Call 5% above the market (SPY200320C00355000) = $0.13 x 100 x 12 = + $156.00 Sell a Put 5% below the market (SPY200320P00319000) = $1.42 x 100 x 12 = + $1,704.00 So on Feb 20th, I would have received $1,860.00 for selling those options. A month later, the idea is that one of those options would be worthless and the other one cheaper than the price paid (of course this was not the case with the current market/Covid-19) On Mar 20th, I would have to pay back Current price of the stock ($SPY) = $244.41 SPY200320C00355000 is now worth $0.01 = $12 SPY200320P00319000 is now worth $77.10 = $92,520.00 leaving me with a total of $ -90,660.00 Although it is clear that this strategy backfired given the current situation, I would like to understand if my calculations are right. More specifically, do I have to consider the fact that for every point that an index option goes beyond the strike, I will have to pay/earn $100? If this is the case, I would have to pay an additional 9,200 per contract (?), or $110,400 Since starting, I learned that an Iron Condor is much more secure than a Strangle and I'm planning to paper trade that strategy for a while.

External answer — Personal Finance Stack Exchange Author: user95212 Original post: https://money.stackexchange.com/a/121822 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I think there's a few things you may be misunderstanding about selling a strangle. First : A month later, the idea is that one of those options would be worthless and the other one cheaper than the price paid (of course this was not the case with the current market/Covid-19) The ideal scenario behind selling a strangle is that both options expire OTM, as they were OTM when you sold them to begin with (in your example, on February 20th). This would result in you keeping all of the premium you initially received , the $1860.00 (not including commissions associated w/ selling these options, which can vary depending on your account, but we'll assume no commissions for the sake of the theoretical scenario). Second part: More specifically, do I have to consider the fact that for every point that an index option goes beyond the strike, I will have to pay/earn $100? If this is the case, I would have to pay an additional 9,200 per contract (?), or $110,400 One, SPY isn't an index and if you wanted to sell options on an index, you could simply sell them on $SPX. Two, I think you're neglecting the fact that movements in the underlying are not the only factor that affects the value of an option, you also have time, and volatility (in a simplified sense) that affect the value of the option you sold. So you can't simply just use this rule of thumb without taking these into account, unless you're saying you are only concerned with what the price the option is on the day of expiration. In this scenario, then yes you'd be only concerned with the difference between the underlying, and the strike price of your option. So regarding the 319 Put that was sold at $1.42 a contract, then on the day of expiration (March 20th) this put would be worth $74.59 a contract, and in your example, this could either get exercised against you (if you let it) and in that case, you'd have to buy 100 * 12 = 1200 shares of SPY at $319.00 which would cost: $319.00 * 1200 = $382,800 and then your position is actually currently worth $244.41 * 1200 = $293,292 so your loss would be: $(293,292 - 382,800) + $1860 = $-87,648 (recall the $1860 in premium you received initially) Or more commonly, you would have to buy back the option to close out the contract (since you sold to open the contract), which would cost: $74.59 * 100 * 12 = $89,508 . Note that the call would expire OTM (worthless) and you don't have to buy it back. But, recall that you initially received $1,860.00 in premium when you sold these two contracts, so your total loss is: $87,648.