SHORT STRANGLE

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

Example




strategy is taken when the options

Suppose Nifty is at 4500 in May. An investor,

investor thinks that the underlying



Mr. A, executes a Short Strangle by selling a Rs.

stockwillexperiencelittle



4300 Nifty Put for a premium of Rs. 23 and a Rs.

volatility in the near term.



4700 Nifty Call for Rs 43. The net credit is Rs.




Risk: Unlimited

66, which is also his maximum possible gain.







Reward: Limited to the premium







Strategy : Sell OTM Put + Sell OTM Call



received













Breakeven:

Nifty index
Current Value
4500








·   Upper Breakeven Point = Strike

Sell Call Option
Strike Price (Rs.)
4700


Price of Short Call + Net






Premium Received







Mr. A receives
Premium (Rs.)
43


·   Lower Breakeven Point = Strike








Break Even Point (Rs.)
4766


Price of Short Put - Net Premium






Received







Sell Put Option
Strike Price (Rs.)
4300















Mr. A receives
Premium (Rs.)
23












Break Even Point (Rs.)
4234











The payoff schedule

On expiry Nifty
Net Payoff from
Net Payoff from Call
Net Payoff

closes at
Put sold (Rs.)
sold (Rs.)
(Rs.)






3800
-477
43
-434



3900
-377
43
-334



4000
-277
43
-234



4100
-177
43
-134



4200
-77
43
-34



4234
-43
43
0



4300
23
43
66



4400
23
43
66



4500
23
43
66



4600
23
43
66



4700
23
43
66



4766
23
-23
0



4800
23
-57
-34



4900
23
-157
-134



5000
23
-257
-234



5100
23
-357
-334



5200
23
-457
-434



5300
23
-557
-534



The payoff chart (Short Strangle)

+                                  =



Sell OTM Put                                  Sell OTM Call                                            Short Strangle