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  • Short Strangle

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    AKSHAYA AKSHAYA
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    The short strangle strategy involves selling an out-of-the-money call option and put option on the same underlying asset with the same expiration date. This creates a position that profits if the underlying asset's price stays within the range between the strike prices. The maximum potential profit is limited to the premiums received, while the risk is unlimited. It is used by investors who are neutral on market direction but bearish on volatility, expecting the asset's price to remain in a narrow range.

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    The short strangle strategy involves selling an out-of-the-money call option and put option on the same underlying asset with the same expiration date. This creates a position that profits if the underlying asset's price stays within the range between the strike prices. The maximum potential profit is limited to the premiums received, while the risk is unlimited. It is used by investors who are neutral on market direction but bearish on volatility, expecting the asset's price to remain in a narrow range.

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    © All Rights Reserved
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    14 views2 pages

    Short Strangle

    Uploaded by

    AKSHAYA AKSHAYA
    The short strangle strategy involves selling an out-of-the-money call option and put option on the same underlying asset with the same expiration date. This creates a position that profits if the underlying asset's price stays within the range between the strike prices. The maximum potential profit is limited to the premiums received, while the risk is unlimited. It is used by investors who are neutral on market direction but bearish on volatility, expecting the asset's price to remain in a narrow range.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    Short Strangle

    Short Strangle is a strategy to be used when the investor is Neutral on the market direction and bearish on
    volatility expecting markets to trade in a narrow range.

    This strategy involves selling an “Out-of-the-Money Call Option” and selling an “Out-of-the-Money Put
    Option”. Both options must have the same underlying security and expiration month.

    Short Strangle is a slight modification to the Short Straddle. The profit payoff region is much wider as
    compared to Short Straddle.

    If the underlying stock does not show much of a movement, the investor of the Short Strangle gets to keep the
    premium.

    Investor view: Neutral on direction and bearish on volatility of the Stock/ Index.

    Risk: Unlimited.

    Reward: Limited to net premium received.

    Upper breakeven: Sell Call Strike price + net premium received.

    Lower breakeven: Sell Put Strike price – net premium received.

    Illustration

    Eg. Nifty is currently trading @ 5500. A Short Strangle can be created by selling Put Strike 5400 @ premium
    of 80 and selling Call Strike 5600 @ 90 respectively. Net inflow of premium is 170.

    Strategy Stock/Index Type Strike Premium

    Short Strangle NIFTY(Lot Sell PUT 5400 80 (Inflow)


    size 50)

    Sell CALL 5600 90 (Inflow)

    The payoff schedule and chart for the above is shown below.

    Page 30
    Payoff Schedule Payoff Chart
    NIFTY @ Net Payoff ( ) 10000
    Expiry
    8000
    5000 -11500
    6000
    5100 -6500
    5200 -1500 4000

    5230 0 2000
    5300 3500
    0
    5400 8500 5100 5200 5300 5400 5500 5600 5700 5800 5900
    5500 8500 -2000

    5600 8500 -4000


    5700 3500
    -6000
    5770 0
    -8000
    5800 -1500
    5900 -6500
    6000 -11500

    In the above chart, the breakeven happens the moment Nifty crosses 5230 or 5770 and reward is limited to a
    maximum of 8500 (calculated as Lot size * Premium received).Here it is important to note that the premium is
    calculated as the sum of premium received for the Call and Put option. The risk in such a strategy is unlimited.

    Disclaimer

    Page 31

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