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:
- 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.
- 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.
- The expiry of both options should be the same.
- 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.
- The price of both options should be approximately equal.
- 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 did Not 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.