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Short Strangle Option Strategy

Short Strangle Option Strategy

What is Short Strangle Option Strategy?

  • Short Strangle like Short Guts is a range bound Strategy that aims to make money wherein you don't expect any movement in stock or fall on volatility. Short Guts strategy demands underlying not to move significantly i.e., this is non direction strategy. In other words, if the underlying fails to show a significant move trader will keep the premium as the option expires worthless.

When to Execute?

  • Short Strangle is a non-directional strategy, but trade must also be bearish on volatility. It is advised that short Strangle should be implemented when there is no event in near term, and volatility is on the higher side and expected to decrease or can be implemented on low Volatile underlying. Expiry should be nearest to gain from time decay that happens highest in near term expiry.

What is the Trade?

  • Under Short Strangle we buy Sell lot of Out-of-Money (OTM) Call and Put for the same expiration, distance should be equal between the strike price from the ATM.

Break-Even Point

  • Short Strangle will have 2 break-even points. The breakeven points can be calculated as given below. Lower Breakeven = PE - Net Premium Received. Upper Breakeven = CE + Net Premium Received.

What will be maximum profit?

  • Maximum Profit is defined if market doesn’t show significant move above or below the strike sold.

What will be maximum loss?

  • It is a Net credit strategy as we have sold both Call & Put. Maximum Loss is undefined If market shows the significant move and stays in above upper and lower breakeven.

What are the advantages?

  • Profit from Range bound stock. 1. Profit from range bound stock. 2. Comparatively high yielding income strategy but less than Short Straddle. 3. Provides a broader range of profitability. 4. Time decay is beneficial.

What are the disadvantages?

  • Uncapped Risk on either side. Hedging cost would be high if stock gives any directional movement.

Example for Short Strangle:

  • Nifty future price is 15500. Short Strangle can be devised by selling one lot of 15200 PE @ 160.00 and one lot of 15800 CE at Rs. 140.00. Net Premium Received = Rs.300. Undefined loss potential if stock moves above or below the upper or lower breakeven i.e., 15720 and 15280. Max Profit if underlying closes between 14900-16100.