STRANGLE STRATEGY
In the Strangle strategy, both option buying and option selling are used. But the option is most used in selling and is also the most profitable Strategy. “out the money” options are either bought or sold. Strangle strategy, there are two types of strategy one is Long Strangle Strategy) and another is Short Strangle Strategy. But the Short strangle strategy is more profitable compared to the long strangle strategy. let's understand strategy in simple language.
SHORT STRANGLE STRATEGY
A short Strangle strategy is very profitable for a neutral market if the market is not bullish or bearish or has no volatility movement. Money is earned by selling “Out the money” call option & put option. Most of the time, 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 stop loss is hit, it is necessary to follow the stop loss. By using this strategy, we can make 30 to 40% profit in option trading within a year. In this way, the strategy to earn profit by selling out-of-the-money call and put options.
Remember these things to make a Short Strangle strategy
1. This strategy will be used only for a neutral market, there is no movement or volatility.
2. There are two options, one is the Call (CE) option and one is the Put (PE) option, both of which have to be sold.
3. The expiry of both options should be the same.
4. If both the options are Nifty then it should be of Nifty, if Bank is of Nifty then it should be of Bank Nifty only.
5. This strategy can be used in the morning time of 09:20 to 09:30 on the day of expiry, 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 profit.
Let us understand with the help of the option chain, how it works.
As shown in the option chain above, Tuesday is Fin Nifty weekly expiry, where Fin Nifty was seen trading in a range, due to which the prices of out-of-the-money call options and out-of-the-money put options are very low, and in expiry day out the money price will be zero.
Similarly, we can go for 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-of-the-money call option and out-of-the-money put option becomes zero.
Fin Nifty as shown above has closed above 21500, which is called as all out the money call options above 21500 and below 20550 put will be zero. So, there we should sell 100 to 150 points out of the money call and put options in weekly Expiry Nifty (NIFTY) and Fin Nifty in the morning. 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 21950 CALL ₹10
(RECEIVED PREMIUM) SELL POSITION = PREMIUM PRICE OF 21200 PUT ₹9.95
TOTAL RECEIVED PREMIUM = 10+9.95
TOTAL PROFIT 19.95 POINT * (LOT SIZE 40) = ₹798
TOTAL LOSS = UNLIMITED (if stop loss is not applied)
Situation-1 If there is a rise in the market and that rise takes Fin Nifty above 21950 and closes above 22000 in expiry, then here we will incur a loss of approximately 40 to 41 points in the call option. But the put option of Rs 21200 will yield a profit of only ₹9.95.
(If we have not set stop loss, then it is very important to set stop loss.)
For example, if the market closes at the level of expiry, then it will be 21950-22000=50 points, where the price of our call option is ₹50, then we will price that also minus will give a loss of 50-10=40 points from the call option. But the price of the put option complete will become ₹0, due to which we will get a full profit of ₹9.95, then we will also subtract this from the loss. ₹40-9.95=31.05 Now we will have a total loss of 31.05 points.
Situation-2 If there is a recession in the market and the market goes below 21200, then we will see the same loss in the put option. If the market goes below 21200, we will see a loss 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.
For example, if the market closes at the level of 21150 at expiry, then it will be 21200-21150=50 points. Where the price of our put option is ₹9.95, then we will reduce its price by 50-9.95=40.05 and we have also sold the call option, whose price will become ₹0, so this price will also be reduced by 40.05 and 40.05-10=30.05 then we will have a total loss of 30.05 points.
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 we will gain more. So as our profit is already estimated. The money we have invested in selling, Same there will be benefit. 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 between 21200 to 21950, then the price of both call and put options will be around ₹0.
(To understand this more easily, please read Option Greeks which I have explained very well.)
How much capital will be required in the Short Strangle Strategy?
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 Short Stragel position each lot requires ₹ 100000 within Nifty and FIN Nifty and to create the next position against it, another ₹ 10000-20000 is required.
The screenshot is attached for your reference.
