When selling strangles, you may need to make an adjustment as the stock price changes in one direction. In this video, we’ll discuss the defensive short strangle adjustment of rolling down the short call options.
When selling strangles, your directional exposure will typically begin close to zero, as short strangles are usually structured as market-neutral trades. However, if the stock price starts to trend in one direction, you may need to make an adjustment to neutralize your directional risk.
In this video, we’ll cover how to “roll down” the short call options of the short strangle, which is one of the short strangle adjustments available to you when the stock price decreases.
By rolling down the short call options of a short strangle position, you will increase the option premium that you receive, which will “push” your lower breakeven point further below the stock price.
Additionally, you will neutralize your position delta, which means you’ll lose less money if the stock price continues to fall. However, that also means you’ll make less money (or potentially lose money) if the stock price starts to rise after you roll down the call option.
Lastly, you’ll also have a lower probability of profit because rolling down the short calls narrows your range of profitability.
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