Option Strategies

Follow these steps to implement the short strangle strategy:

1. In the Initializeinitialize method, set the start date, end date, cash, and Option universe.

private Symbol _symbol;

public override void Initialize()
{
    SetStartDate(2017, 4, 1);
    SetEndDate(2017, 4, 30);
    SetCash(100000);

    UniverseSettings.Asynchronous = true;
    var option = AddOption("GOOG");
    _symbol = option.Symbol;
    option.SetFilter(universe => universe.IncludeWeeklys().Strangle(30, 5, -10));
}

def initialize(self) -> None:
    self.set_start_date(2017, 4, 1)
    self.set_end_date(2017, 4, 30)
    self.set_cash(100000)

    self.universe_settings.asynchronous = True
    option = self.add_option("GOOG")
    self._symbol = option.symbol
    option.set_filter(lambda universe: universe.include_weeklys().strangle(30, 5, -10))

The Stranglestrangle filter narrows the universe down to just the two contracts you need to form a short strangle.

2. In the OnDataon_data method, select the contracts of the strategy legs.

public override void OnData(Slice slice)
{
    if (Portfolio.Invested ||
        !slice.OptionChains.TryGetValue(_symbol, out var chain))
    { 
        return;
    }

    // Find options with the farthest expiry
    var expiry = chain.Max(contract => contract.Expiry);
    var contracts = chain.Where(contract => contract.Expiry == expiry).ToList();

    // Order the OTM calls by strike to find the nearest to ATM
    var callContracts = contracts
        .Where(contract => contract.Right == OptionRight.Call &&
            contract.Strike > chain.Underlying.Price)
        .OrderBy(contract => contract.Strike).ToArray();
    if (callContracts.Length == 0) return;

    // Order the OTM puts by strike to find the nearest to ATM
    var putContracts = contracts
        .Where(contract => contract.Right == OptionRight.Put &&
            contract.Strike < chain.Underlying.Price)
        .OrderByDescending(contract => contract.Strike).ToArray();
    if (putContracts.Length == 0) return;

    var call = callContracts[0];
    var put = putContracts[0];

def on_data(self, slice: Slice) -> None:
    if self.portfolio.invested:
        return

    chain = slice.option_chains.get(self._symbol)
    if not chain:
        return

    # Find options with the farthest expiry
    expiry = max([x.expiry for x in chain])
    contracts = [contract for contract in chain if contract.expiry == expiry]
     
    # Order the OTM calls by strike to find the nearest to ATM
    call_contracts = sorted([contract for contract in contracts
        if contract.right == OptionRight.CALL and
            contract.strike > chain.underlying.price],
        key=lambda x: x.strike)
    if not call_contracts:
        return
        
    # Order the OTM puts by strike to find the nearest to ATM
    put_contracts = sorted([contract for contract in contracts
        if contract.right == OptionRight.PUT and
           contract.strike < chain.underlying.price],
        key=lambda x: x.strike, reverse=True)
    if not put_contracts:
        return

    call = call_contracts[0]
    put = put_contracts[0]

3. In the OnDataon_data method, place the orders.

Approach A: Call the OptionStrategies.ShortStrangleOptionStrategies.short_strangle method with the details of each leg and then pass the result to the Buybuy method.

var shortStrangle = OptionStrategies.ShortStrangle(_symbol, call.Strike, put.Strike, expiry);
Buy(shortStrangle, 1);

short_strangle = OptionStrategies.short_strangle(self._symbol, call.strike, put.strike, expiry)
self.buy(short_strangle, 1)

Approach B: Create a list of Leg objects and then call the Combo Market Ordercombo_market_order, Combo Limit Ordercombo_limit_order, or Combo Leg Limit Ordercombo_leg_limit_order method.

var legs = new List<Leg>()
    {
        Leg.Create(call.Symbol, -1),
        Leg.Create(put.Symbol, -1)
    };
ComboMarketOrder(legs, 1);

legs = [
    Leg.create(call.symbol, -1),
    Leg.create(put.symbol, -1)
]
self.combo_market_order(legs, 1)

The payoff of the strategy is

$$ \begin{array}{rcll} C^{OTM}_T & = & (S_T - K^{C})^{+}\\ P^{OTM}_T & = & (K^{P} - S_T)^{+}\\ P_T & = & (-C^{OTM}_T - P^{OTM}_T + C^{OTM}_0 + P^{OTM}_0)\times m - fee \end{array} $$ $$ \begin{array}{rcll} \textrm{where} & C^{OTM}_T & = & \textrm{OTM call value at time T}\\ & P^{OTM}_T & = & \textrm{OTM put value at time T}\\ & S_T & = & \textrm{Underlying asset price at time T}\\ & K^{C} & = & \textrm{OTM call strike price}\\ & K^{P} & = & \textrm{OTM put strike price}\\ & P_T & = & \textrm{Payout total at time T}\\ & C^{OTM}_0 & = & \textrm{OTM call value at position opening (debit paid)}\\ & P^{OTM}_0 & = & \textrm{OTM put value at position opening (debit paid)}\\ & m & = & \textrm{Contract multiplier}\\ & T & = & \textrm{Time of expiration} \end{array} $$

The following chart shows the payoff at expiration:

The maximum profit $C^{OTM}_0 + P^{OTM}_0$. It occurs when the underlying price at expiration remains within the range of the strike prices. In this case, both Options expire worthless.

The maximum loss is unlimited if the underlying price rises to infinity or substantial, $C^{OTM}_0 + P^{OTM}_0 - K^{P}$, if it drops to zero at expiration.

If the Option is American Option, there is a risk of early assignment on the contracts you sell.

The following table shows the price details of the assets in the algorithm at Option expiration (2017-04-22):

Asset	Price ($)	Strike ($)
Call	8.00	835.00
Put	7.40	832.50
Underlying Equity at expiration	843.19	-

Therefore, the payoff is

$$ \begin{array}{rcll} C^{OTM}_T & = & (S_T - K^{C})^{+}\\ & = & (843.19-835.00)^{+}\\ & = & 8.19\\ P^{OTM}_T & = & (K^{P} - S_T)^{+}\\ & = & (832.50-843.19)^{+}\\ & = & 0\\ P_T & = & (-C^{OTM}_T - P^{OTM}_T + C^{OTM}_0 + P^{OTM}_0)\times m - fee\\ & = & (-8.19-0+8.00+7.40)\times100-2.00\times2\\ & = & 719 \end{array} $$

So, the strategy gains $719.

The following algorithm implements a short straddle strategy: