The short strangle is an unlimited risk options strategy that consists of a short put and a short call. It can be directionally skewed bearish/bullish or it can be neutral and operates on the assumption that price of the underlying will remain in a range for the duration of the trade. Upon expiry, if the price of the underlying remains between the strike prices, both the short call and the short put expire worthless, and the maximum profit is realized.
Example: AAPL September 4th Expiry Short Strangle with a short call strike at 133 and a short put strike at 166.
POP (Probability of Profit): 75%
Max Profit: $182
Max Loss: Unlimited
BE's (Break Evens): 114.18/134.82
Notes: As a practical matter, a trader who is reasonably adept at using short strangles never, in actuality, realizes unlimited loss. First of all, at least one side will expire worthless. Secondly, the short strangle trader can opt to roll options out for duration and credit should one side of the set up be tested in order to give the trade additional time to work out or to reduce potential loss. Additionally, the short strangle is considered most profitable in periods of high , since those periods are generally followed by low periods (i.e., the set up benefits from "crush" or contraction).