The covered strangle is an advanced income strategy that combines a covered call with a cash-secured put on the same stock. This powerful combination allows you to collect premium from both sides while managing a position in a stock you want to own. This guide will teach you how to implement covered strangles effectively.
What is a Covered Strangle?
A covered strangle consists of three components:
- Long stock: Own 100 shares of the underlying
- Short call: Sell a call option (covered by your shares)
- Short put: Sell a put option (cash-secured)
The covered strangle advantage: You collect premium from both a covered call AND a cash-secured put. This roughly doubles your income potential compared to a simple covered call, but requires more capital and carries additional risk.
How the Covered Strangle Works
Example: Covered Strangle on AMD
You own 100 shares of AMD at $150. AMD is currently trading at $155.
- Own 100 shares at $150 (investment: $15,000)
- Sell $165 call (30 DTE) for $3.00 ($300)
- Sell $145 put (30 DTE) for $2.50 ($250)
- Cash secured for put: $14,500
- Total premium: $5.50 ($550)
- Total capital deployed: $29,500
Possible outcomes:
- AMD stays between $145-$165: Keep shares + $550 premium
- AMD rises above $165: Shares called away at $165 + keep $550
- AMD drops below $145: Buy 100 more shares at $145 + keep $550
Benefits of the Covered Strangle
- Double premium: Collect from both sides of the trade
- Lower cost basis: Premium reduces your effective purchase price
- Flexibility: Profit in up, down, or sideways markets
- Defined outcomes: Know exactly what happens at each price level
- Compound effect: Monthly premium compounds over time
Risks of the Covered Strangle
Understanding the risks is crucial before implementing this strategy:
- Double exposure: If assigned on the put, you own 200 shares
- Significant capital: Requires cash for shares AND put assignment
- Stock risk: A major decline hurts both existing shares and new assignment
- Upside capped: You miss out on gains above the call strike
Strike Selection for Covered Strangles
Call Strike Selection
- Above cost basis: Ensure profit if called away
- 25-35 delta: Good premium with upside room
- Above resistance: Less likely to be tested
Put Strike Selection
- Below current price: Gives stock room to fall
- Price you want to buy more: Happy to own at this level
- 20-30 delta: Balanced probability and premium
- At or below support: Technical safety margin
Example: Strike Selection Process
MSFT trades at $420. You own 100 shares at $400.
- Call strike: $440 (5% above current, above cost basis)
- Put strike: $400 (5% below current, at your cost basis)
- If called away: Profit of $40/share + premium
- If put assigned: Average cost becomes $400 (your original cost)
Optimal Timing for Covered Strangles
Best Market Conditions
- Sideways trending: Stock bouncing in a range
- Elevated IV: More premium on both sides
- Stable fundamentals: No major catalysts expected
Days to Expiration
- 30-45 DTE: Optimal theta decay, time to manage
- Same expiration: Keep call and put on same cycle
- Monthly options: Better liquidity than weeklies
When to Avoid
- Before earnings announcements
- When stock is in a strong trend (up or down)
- During market uncertainty (high VIX)
- When you cannot afford additional shares
Managing Covered Strangle Positions
Profit Taking
- Close entire position at 50% of max premium
- Close individual legs independently if one side reaches 75% profit
- Roll to next month when 21 days or less remain
Managing the Call Side
If the stock rallies toward your call strike:
- Let it be called: Take the profit and move on
- Roll up and out: Buy back call, sell higher strike next month
- Close for loss: If you strongly want to keep shares
Managing the Put Side
If the stock drops toward your put strike:
- Accept assignment: You wanted more shares anyway
- Roll down and out: Buy back put, sell lower strike next month
- Close for loss: If your thesis has changed
Example: Rolling the Put Side
AMD drops to $147, testing your $145 put. 10 days remain.
- The $145 put is now worth $5.00 (you sold for $2.50)
- Buy back $145 put for $5.00 (loss of $2.50)
- Sell $140 put (next month) for $4.00
- Net credit on roll: -$1.00
- New strike gives 5 more points of cushion
Position Sizing for Covered Strangles
Covered strangles require significant capital:
Capital calculation: You need capital for both your shares AND the potential put assignment. For a $150 stock, that is $15,000 for shares plus $15,000 for the put assignment = $30,000 per covered strangle.
- Calculate total exposure as shares + potential new shares
- Never risk more than 15-20% of account on one covered strangle
- Ensure you can actually afford double the shares
- Keep reserve capital for adjustments
Covered Strangle Income Expectations
What returns can you expect from covered strangles?
- Monthly premium: 2-4% on total capital deployed
- Annual premium: 15-30% on capital (not including stock gains)
- Win rate: 60-75% of months profitable
Remember, these returns come with the risk of owning additional shares if assigned, so stock selection is critical.
Best Stocks for Covered Strangles
Ideal Characteristics
- Quality companies: Stocks you want to own long-term
- Moderate IV: 30-50% implied volatility
- Range-bound: Trading in a defined channel
- Good liquidity: Tight option spreads
- Affordable: Can handle owning 200 shares
Popular Choices
- Tech: AMD, INTC, MU (affordable high IV)
- Finance: BAC, C, WFC
- Consumer: F, GM, NKE
- ETFs: XLF, XLE, IWM
Track Your Covered Strangle Performance
Pro Trader Dashboard tracks all your covered strangle trades. See premium collected, assignment rates, and total returns including stock appreciation.
Covered Strangle vs Other Strategies
Covered Strangle vs Covered Call
- Premium: Covered strangle collects roughly 2x the premium
- Capital: Covered strangle requires roughly 2x the capital
- Risk: Covered strangle has more downside exposure
Covered Strangle vs Wheel Strategy
- Wheel: Alternates between puts and calls sequentially
- Covered strangle: Sells both simultaneously
- Efficiency: Covered strangle is more capital efficient
Common Covered Strangle Mistakes
- Wrong stock selection: Trading stocks you would not want to own more of
- Insufficient capital: Cannot afford assignment if put is exercised
- Ignoring the trend: Selling in strong downtrends
- Too aggressive strikes: Getting assigned or called away frequently
- No exit plan: Not knowing how to manage both sides
Summary
The covered strangle is a powerful income strategy for traders who want to maximize premium collection on stocks they already own. By combining a covered call with a cash-secured put, you can potentially double your income compared to selling covered calls alone. However, this requires more capital and carries the risk of owning additional shares. Focus on quality stocks, proper strike selection, and active management to make covered strangles a core part of your income strategy.
Want to explore similar strategies? Learn about short strangle income or discover the jade lizard strategy for defined-risk variations.