Schaeffer’s Option Coach: A Theoretical Short Strangle on H.J. Heinz

Welcome back to another in a series of articles that examines the thought process behind a variety of option strategies using stock, index, and/or exchange-traded fund (ETF) options. One interesting trading strategy that we haven't covered in a while is the short strangle. This column will examine a short strangle, the pros and cons of this trade, and its profit and loss potential. So, let's jump into this strategy.

In digging for today's trading example, our theoretical strangle seller went trolling in the Schaeffer's Volatility Index vs. Historical Volatility Filter for a possible play. This filter can be used to look for stocks that have options with high implied volatility readings in comparison to the security's historical performance. From that initial list, the trader removes any companies that are slated to report earnings during the short term and are not trading in a range. The end result of today's search is H.J. Heinz (NYSE: HNZ), which isn’t slated to report earnings until Nov. 24 - after front-month options expire on Oct. 16.

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