The covered strangle, explained
Own a hundred shares, sell a call above and a put below. Two premiums arrive at once. The part that needs stating plainly is that you may end up owning two hundred shares.
- Construction
- Long 100 shares + short call above + short put below
- Outlook
- Neutral to mildly rising, willing to double the position
- Premium
- Collected at entry
- Complexity
- 3 of 3
What it is
This is two structures you already know, running simultaneously on the same underlying: a covered call, backed by shares you own, and a cash-secured put, backed by cash set aside. Both collect premium, so the position opens with two credits rather than one.
The upside behaves exactly like a covered call — capped at the call strike, with the shares called away above it. The downside is where the structure earns its reputation. Below the put strike you are assigned a second hundred shares, while the first hundred are also losing value. The loss accrues at twice the rate of the share position alone.
That doubling is the whole risk and it is easy to underestimate when reading the premium figures. A covered strangle should be sized as though you already hold two hundred shares, because in the outcome that matters you will.
How it works
Hold a hundred shares
These cover the call leg, exactly as in an ordinary covered call.
Set aside cash for a hundred more
This secures the put leg. Without it the put is naked and the structure's risk changes character entirely.
Sell a call above the current price
The price at which you are content to let the existing shares go.
Sell a put below the current price
The price at which you are content to buy a second hundred. Both legs normally share an expiry.
Size it as a double position
The capital genuinely at stake is a hundred shares plus the cash for a hundred more. Anything less and assignment on the put leg cannot be met as intended.
The payoff
- Max profit
- $1,400
- Max loss
- −$18,600
- Break-even
- $96
Worked example
XYZ is a placeholder, not a real security. Every guide in this section uses it at $100 so the structures can be compared directly.
XYZ trades at $100 and you own a hundred shares. You sell the $110 call for $2.00 and the $90 put for $2.00, collecting $400 in total, and reserve $9,000 against the put.
If XYZ finishes between $90 and $110, both options expire worthless. You keep the $400 and the hundred shares.
If XYZ finishes above $110, the shares are called away at $110. Gain: $1,000 on the shares plus $400 in premium.
If XYZ finishes at $80, you are assigned a second hundred shares at $90. You now hold two hundred shares — one lot bought at $100, one at $90 — worth $80 each. The loss is $2,000 on the first and $1,000 on the second, less $400: $2,600 down, against $2,000 for the plain share position. That gap is the structure.
Break-even is $96. That is the $100 you paid for the shares less the $4 of premium collected — it is driven by the stock you already own, not by the put strike. Below $90 the position then deteriorates at twice the rate, because a second hundred shares has been assigned on top of the first.
Both sides of it
What it gives you
- Two premiums collected from one underlying and one expiry
- A wide range in which both legs expire worthless and everything is kept
- Both legs are covered — shares for the call, cash for the put
- Shares are acquired or released at prices chosen in advance
What it costs you
- Below the put strike the position doubles into a falling underlying
- Losses accrue at roughly twice the rate of the share position alone
- Upside remains capped at the call strike, as with any covered call
- Requires capital for two hundred shares while paying premium on one position
What assignment does
Both legs can be assigned, but not usefully at the same time. Call assignment sells the hundred shares you hold at the strike. Put assignment buys a second hundred at that strike, using the reserved cash. The second is the one that changes the position's character, and it happens exactly when the underlying has fallen.
Frequently asked questions
- Why is a covered strangle riskier than a covered call?
- Because of what happens below the put strike. A covered call's worst case is the decline on a hundred shares. A covered strangle's is the decline on a hundred shares plus a second hundred assigned to you partway down, so the position loses at roughly double the rate once the put strike is breached. The two extra premiums do not come close to compensating for that in a substantial fall.
- How much capital does a covered strangle need?
- Enough for two hundred shares: the hundred you already hold, plus cash for the hundred the put could assign. Sizing it on the basis of the hundred you own is the standard mistake, and it produces a position that cannot meet its own put leg without borrowing.
- What happens if both options expire worthless?
- The best outcome: both premiums are kept, the shares stay, the reserved cash is released, and the position can be reopened. This requires the underlying to finish between the two strikes, which is the wide middle section of the payoff diagram.
- Can both legs be assigned at once?
- Not at expiry — the price cannot finish above the call strike and below the put strike simultaneously. Before expiry it is possible in unusual circumstances if the underlying swings through both levels and holders on each side exercise early, but this is rare and would require the price to travel a long way in both directions within the option's life.
Related guides
These guides explain how each structure is built and how it behaves. Nothing here is a suggestion to buy or sell anything, no security is named, no figure is quoted from any market, and no structure is presented as better than another — which one suits a situation is not a question this page can answer.
⚠ Important disclaimer
These calculators are provided strictly for educational and informational purposes. They perform arithmetic on figures you enter. Nothing on these pages is financial, investment, trading, legal or tax advice, nor a recommendation to buy, sell or hold any security, derivative, commodity or cryptocurrency.
The creator is not a registered investment adviser, research analyst or broker with the SEC, FINRA, CFTC, NFA, any U.S. state securities regulator, or SEBI (as an Investment Adviser or Research Analyst). Trading involves substantial risk of loss — you can lose some or all of your capital, and with leveraged instruments you can lose more than you deposit.
Contract specifications, lot sizes and margin rates shown here are seeded from published standards, are editable, and may be out of date or wrong for your broker. Exchanges revise lot sizes and margin requirements, and brokers routinely impose more than the regulatory minimum. Verify every figure against your own broker before acting on it. These tools carry no warranty of any kind and may contain errors.
You are solely responsible for your own decisions. Read the full legal disclaimer →