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Covered Strangles Done Right
Weekly Edition: February 4th, 2026
Market Movements
Current Level | Weekly Return | YTD | |
|---|---|---|---|
S&P 500 | 6,917.81 | -1.202% | 1.06% |
NASDAQ | 23,255.19 | -2.962% | 0.06% |
Dow Jones | 49,240.99 | 0.441% | 2.45% |
VIX | 18.00 | 11.871% | 20.40% |
Russell 2000 | 2,648.50 | -1.213% | 5.91% |
*Weekly Return is calculated as market open of the previous Wednesday, to market close this Tuesday (yesterday); Current Level is Tuesday’s (yesterday’s) close.
Weekly Rollout
A tech-led selloff is dragging everything lower
Trump strikes a trade deal with India
The January jobs report is delayed thanks to the partial shutdown
It seems that corporate jobs are being slashed for “2026 efficiency efforts”
$1T in bonds, fastest ever
Is US manufacturing coming back?
“Good-To-Know’s”
Theta Decay — aka time decay, is the gradual reduction in an option’s extrinsic value as the expiration date approaches. Options are deteriorating assets, meaning all else equal, their value erodes over time. This is the default phenomenon that makes option sellers money.
This erosion of extrinsic value works in favor of the seller, since the seller collects premium up front. Option sellers ideally would buy the option back later at a lower price or let it expire worthless (this is ideal, but definitely not always what happens).
Time decay isn’t the same throughout the option’s life either. It accelerates as we near expiration. Early in a contract’s life, decay is slow, but as the contract’s final days approach, it ramps up quickly.
This is one of the core principles that must be understood to fully realize the advantage that option-sellers have.
Theta can be your biggest ally if you let it.
Quote(s) I Like
“I would rather earn 1% of 100 people’s efforts than 100% of my own efforts.”
“An investor who will study values and market conditions, and then exercise enough patience for six men will likely make money in stocks.”
Thought Throttle
We sell options to get more out of positions we already believe in. The company comes first. The options are just the gravy.
But how can we load up on the gravy?
A covered strangle is one of the simplest ways to do this. It’s a cash-secured put and a covered call running at the same time. You legitimately are combining the two. Talk about income galore.
For an in-depth breakdown of covered strangles, check this article out:
There is also an example in the trade mechanics section.
Though covered strangles are one of the most straightforward ways to layer income on top of ownership, they are also one of the easiest structures to misuse.
Mechanically, it’s simple—own shares, have available cash, sell an out-of-the-money call, and sell an out-of-the-money put.
But there are a couple of things that we need to consider when using this structure…
Symmetry May Not Always Be Ideal
Many traders default to equal deltas on both sides because it looks balanced. In reality, symmetry can increase risk by ignoring the existing exposure.
Covered strangles are most effective when they’re intentionally skewed away from the side that would cause the most discomfort.
There is a higher likelihood of not being pissed off if we select strikes that actually make us indifferent to assignment.
The Put Defines Your Willingness to Commit Capital
Along the same lines, recognize that selling a put should feel similar to placing a limit order (there are massive differences, but conceptually valid). If the idea of owning more shares at the put’s strike is uncomfortable, then the trade is misaligned.
Don’t throw out conviction for a little bit of premium.
The Right Kind of Volatility
Covered strangles work best when volatility is higher, but stable/trending down. You want enough uncertainty to collect premium, without the sharp moves that can hurt.
When volatility is driven by events or headlines, price can move much faster than time decay can keep up with. The trade may not get the time it needs to work.
Don’t Chase Entries After Big Moves
Large directional days distort perception.
Entering immediately afterward often leads to premature adjustments and emotional decision-making. Let volatility and price normalize first. Stick with the facts—and facts don’t care about your feelings, lol.
Design for Tolerance, Not Precision
Covered strangles are not meant to pinpoint the exact price of the stock at expiration. They’re meant to allow some movement without consequence. If every small fluctuation feels dire, the structure is probably too restrictive.
Know When to Step Away
If the underlying company (think of shares as pieces of businesses, not just “stocks”) no longer aligns with your long-term view, continuing the covered strangle is not strategic.
You’re still bullish/positive delta-wise in a covered strangle, so if the company is no good, get out. Premium and irrational feelings of “what-if” should not compromise your hard-earned dollars.
Tight bid-ask spreads and consistent volume reduce friction, especially in trades with multiple legs. Over time, execution quality matters more than squeezing out a little extra credit.
To Summarize…
These are simply things to keep in mind when using covered strangles. Do your own research and apply them where they make sense.
Best of luck, and thanks for reading.
Trade Mechanics
This week, we’re using a covered strangle, which adds income on top of an existing stock position. This structure clearly defines both our potential exit price (Covered Call) and our potential re-entry price (Cash-Secured Put).
The structure is straightforward—have cash, own shares, sell an out-of-the-money call, and sell an out-of-the-money put.
Let’s look at Nvidia (NVDA), which currently trades around $180.34. We will assume that we buy 100 shares at the current price, costing a total of $18,034 (180.34 price × 100 shares).
Nvidia (NVDA) | |
|---|---|
Current Price | $180.34 |
Shares Owned | 100 shares @ $180.34 |
Call Sold | Mar 20 ’26 $200 Call (~30 delta) |
Put Sold | Mar 20 ’26 $170 Put (~33 delta) |
Total Premium Received | $12.53 |
Cash Required for Put | $15,747 |
Effective Call Sale Price | $212.53 |
Effective Put Entry Price | $157.47 |
This trade pays $1,253 up front for agreeing to one of three outcomes by expiration:
(1) sell our shares at $200 if price rallies,
(2) buy additional shares at $170 if price pulls back, or
(3) keep all of the premium, all of the “secured” cash, and all of the shares, if the price stays between $170 and $200.
If shares are called away (price > $200), we exit at our predefined price. If we’re assigned on the put (price < $170), we add shares at our pre-planned discount.
And of course, if the price stays between the strikes ($170 < price < $200), both options expire worthless and we keep the full premium of $1,253 while continuing to hold shares and the cash we used to secure the put. Not bad at all.
In short, this is a “get-paid-for-flexibility-and-time” trade. We collect income for being willing to sell higher or buy lower, letting time do the heavy lifting.
This is for educational purposes only—not a trade recommendation. Remember to always do your own due diligence and consult a financial advisor before making investment decisions.
Throttle Q&A
How Does the Options Market Estimate Expected Movement?
Options prices reflect what investors are willing to pay for uncertainty. By looking at option premiums, we can infer how much movement the market is pricing in for a stock over a given time period.
One common approach is the straddle method, which adds the at-the-money call and put premiums together to estimate the market’s expected move by expiration.
Another approach uses implied volatility, which translates volatility, time, and price into an expected range. Many platforms calculate this automatically.
These aren’t a promise, but a snapshot of collective expectations.
At Theta Throttle, this matters because most premium-selling strategies work best outside the expected move. You don’t necessarily need to be right about direction, just positioned where normal movement doesn’t hurt you.
For more on expected movements, check out this previous edition:
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Disclaimer
The information provided in this newsletter is sourced from reliable channels; however, we cannot guarantee its accuracy. The opinions expressed in this newsletter are solely those of the editorial team, contributors, or third-party sources and may change without prior notice. These views do not necessarily reflect those of the firm as a whole. The content may become outdated, and there is no obligation to update it.
Options come with inherent risks. We strongly advise you to consult with a financial advisor before making any investment decisions, including determining whether any proposed investment aligns with your personal financial needs.
