SHORT STRANGLE
A Short
Strangle is a slight modification to the Short Straddle. It tries to improve
the profitability of the trade for the Seller of the options by widening
the breakeven points so that there is a much greater movement required in the
underlying stock / index, for the Call and Put option to be worth exercising.
This strategy involves the simultaneous selling of a slightly out-of-the-money
(OTM) put and a slightly out-of-the-money (OTM) call of the same underlying
stock and expiration date. This typically means that since OTM call and put are
sold, the net credit received by the seller is less as compared to a Short
Straddle, but the break even points are also widened. The underlying stock has
to move significantly for the Call and the Put to be worth exercising. If the
underlying stock does not show much of a movement, the seller of the Strangle
gets to keep the Premium.
When to Use: This options trading
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Example
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strategy is taken when the options
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Suppose Nifty is at 4500 in May. An investor,
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investor thinks that the underlying
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Mr. A, executes a Short Strangle by selling a
Rs.
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stockwillexperiencelittle
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4300 Nifty Put for a premium of Rs. 23 and a
Rs.
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volatility in the near term.
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4700 Nifty Call for Rs 43. The net credit is
Rs.
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Risk: Unlimited
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66, which is also his maximum possible gain.
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Reward: Limited to the premium
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Strategy : Sell OTM Put + Sell OTM Call
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received
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Breakeven:
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Nifty index
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Current Value
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4500
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· Upper Breakeven Point =
Strike
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Sell Call Option
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Strike Price (Rs.)
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4700
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Price of Short Call + Net
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Premium Received
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Mr. A receives
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Premium (Rs.)
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43
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· Lower Breakeven Point =
Strike
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Break Even Point (Rs.)
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4766
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Price of Short Put - Net Premium
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Received
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Sell Put Option
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Strike Price (Rs.)
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4300
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Mr. A receives
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Premium (Rs.)
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23
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Break Even Point (Rs.)
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4234
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The
payoff schedule
On expiry Nifty
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Net Payoff from
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Net Payoff from Call
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Net Payoff
|
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closes at
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Put sold (Rs.)
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sold (Rs.)
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(Rs.)
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3800
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-477
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43
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-434
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3900
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-377
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43
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-334
|
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4000
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-277
|
43
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-234
|
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4100
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-177
|
43
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-134
|
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4200
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-77
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43
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-34
|
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4234
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-43
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43
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0
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4300
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23
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43
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66
|
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4400
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23
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43
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66
|
|
4500
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23
|
43
|
66
|
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4600
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23
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43
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66
|
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4700
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23
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43
|
66
|
|
4766
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23
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-23
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0
|
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4800
|
23
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-57
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-34
|
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4900
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23
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-157
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-134
|
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5000
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23
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-257
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-234
|
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5100
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23
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-357
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-334
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5200
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23
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-457
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-434
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5300
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23
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-557
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-534
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