STRANGLE STRATEGY

Strangle strategy is an option trading strategy, where you buy both a call option and a put option with the same expiration date but a different strike price. The main importance of both options is that both options are “Out the money” when you buy or sell both options.

For example:- Nifty is trading at 23700 and expiry is the next day and you are buying or selling fully “Out the money” option above 24000CE and below 23400PE.

There are 2 types of strangle strategy.

1. LONG STRANGLE STRATEGY
2. SHORT STRANGLE STRATEGY

1-LONG STRANGLE STRATEGY

When the fluctuations in the market are more rapid i.e. the speed of the market is more fast, as RBI policy is about to come, either there is a meeting of the Fed Reserve of America or some event. going to happen yes, In such a situation, the ups and downs in the market happen more rapidly, then we go for a strangle strategy. You can earn money in options trading by using this strategy, but if the market is not bullish or bearish, then it will not work. The strategy is very unprofitable and there is no profit to be seen. Use this strategy at the last moment on the day of expiry for HERO ZERO trade. Where it is assumed that if there is a loss, it will be completely zero but if there is a profit, it will be 3 to 4 times.

Long Strangle strategy Remember these things to make it.

1. This strategy is to be used only when there is some turmoil in the market, which we do not know the market may go up or the market may go down.
2. There are two options: the Call (CE) option and the Put (PE) option, both of which have to be bought.
3. The expiry of both options should be the same.
4. If both the options are Nifty then they should be of Nifty call & put, if Banknifty then it should be of Banknifty call and put option only.
5. The price of both options should be approximately equal.
6. Use this strategy at the last moment on the expiry day HERO ZERO can be used in trading, where if there is a loss then, it will be small but if there is a profit then there will be 3 to 4 times the profit.

For example:- Where Nifty is trading at the last minute on the day of expiry, as Nifty is trading at 23700, then the price of a call option of 23900 and a put option of 23500 will be around ₹15 to ₹20. So here both the options have to be bought together, if there is a movement of 150 to 200 points in Nifty, then the price of one option of ₹15 to ₹20 will reach ₹100. Where the profit will be around 4 to 5 times. Similarly, the call and put option of Bank Nifty where it is trading will be around ₹40 to ₹45. If there is a movement of 300 to 400 points in Bank Nifty, then the price of that option will be 200 to 220 points. Where there will be 4 to 5 times profit, but if such movement does not come, then we will suffer only a little loss. Nifty has a total of 35 to 40 points and a total of 80 to 85 points, hence only 10 to 15% of your total capital should be used in this strategy.
 

NOTE:- As mentioned above, this strategy is used at the last moment on the expiry day or on some event day, hence it cannot be mentioned in the option chain now but you must analyze it on the expiry day.

Advantages of Strangle Strategy

1. Potential for high profits, if the stock makes a big move.
2. Less risky than some other options strategies.
3. Flexibility in terms of price movement direction.

2-SHORT STRANGLE STRATEGY

In the Short Strangle strategy money is earned by selling “Out the money” Call and put option. This strategy makes about 70 to 80% profit, if the strategy is traded on normal days by removing some event days, then it makes very good profits. If ever the stoploss is hit, it is necessary to follow the stoploss. By using this strategy, we can make 30 to 50% profit in option trading within 1 year. In this way, the strategy to earn profit by selling “Out the money” call and put options can be shorted.

Remember these things to make a strategy:

1. This strategy is to be used only when there is some turmoil in the market, which we do not know the market may go up or the market may go down.
2. There are two options, a call (CE) option, and a put (PE) option, in which we have to sell the same expiration and a different “Out the money” option.
3. The expiry of both options should be the same.
4. If both the options are Nifty then they should be of Nifty call & put, if Banknifty then it should be of Banknifty call and put option only.
5. The price of both options should be approximately equal.
6. This strategy can be used in the morning time of 09:20 to 10:00 on the day of expiry or one day before, where the price of the option is low and due to lack of movement in the market, its price becomes zero at expiry and The seller of the option makes a profit.

Let us understand with the help of the option chain, how it works.

As shown in the option chain above, today is Wednesday, and the next day is Thursday nifty index weekly expiry. The weekly expiry of Nifty was seen trading in a range, due to which the prices of “Out the money” call and put options dropped.

In the above nifty option chain, both call and put option premium dropped.

Similarly, we go short in such a stock, Strangle positions can be created in which the movement of other stocks is not much and that stock remains in the same range, so that the price of the “Out the money” call and put option becomes zero.

If the market closes in the same range then the price of both options will become zero and we will get profit on both sides. If it goes fast in one direction, there is still an option to win in the opposite direction, that much we should exit with a stop loss.

Only then can continuous profit be made in this strategy.

(RECEIVED PREMIUM) SELL POSITION = PREMIUM PRICE OF 24000CE @13

(RECEIVED PREMIUM) SELL POSITION = PREMIUM PRICE OF 23400PE @9.50

TOTAL RECEIVED PREMIUM = 13+9.50

TOTAL PROFIT 22.5 POINT * (LOT SIZE 75)= 1687

TOTAL LOSS = UNLIMITED (if stop-loss didn’t apply)

 

Situation-1 If there is a rise in the market and that rise takes Nifty above 24000 and closes above 24050 in expiry, then here we will incur a loss of approximately 35 to 40 points in the call option. But the put option of 23400 will yield a profit of only ₹712.

(If we have not set stop-loss, then it is very important to set stop-loss.)

Situation-2  If there is a recession in the market and the market goes below 23700, then we will see the same loss in the put option. If the market goes below 23650, we will see a loss of 50 points in the put option, but we will make a profit in the call option. If we have not set stop-loss, then it is very important to set stop-loss.

Situation-3 If there is neither a bullishness nor a recession in the market, as we had thought based on the analysis, then in case the same happens then we will gain more. So as our profit is already estimated. Therefore, this strategy should be used only when the market is not bullish or bearish or it is the day of weekly expiry.

For example, if the market expiry is around 23300 to 24000, then the price of both call and put options will be around ₹0. then we will get the full profit from both sides.

(To understand this more easily, please read Option Greeks which I have explained very well.)
 

For the Short Strangle Strategy, How much capital will be required to build it?

Whenever we sell in any option, we need to pay more money, so here we have to pay more money to create a short position.

To create a position each lot requires ₹175000 to 195000 within Nifty and Fin Nifty and to create the next position against it, another ₹20000-30000 is required.
 

For example, if you sold one lot of call options, then ₹175000 to 195000 would be required but when you sold a put option, only ₹20000-30000 would be required, so the total here for one lot of calls and put option would be ₹190000-200000 will be required.