Hi friends. I hope you are doing great. I
understand that the festive season is knocking the door and so are the
festive expenses. So you don’t have much to trade. Well that’s ok. Our
strategy today is for people who are a little tight on liquidity. But
apart from the people who are neutral in the market. If you are both
than today’s strategy can be a blessing if you can execute it properly.
So without waiting any further let’s discuss the Strategy.
Long Strangle
This strategy involves the buying of a
slightly out-of-the-money (OTM) Put and a slightly out-of-the-money
(OTM) Call of the same underlying stock / index and expiration date at
the same time.
Here it is very important for you to be directional neutral. But
remember this strategy works only incase of increased volatility in the
stock / index and the prices moving significantly in either direction.
Since OTM options are purchased for both
Calls and Puts it makes the cost of executing a Strangle cheaper as
compared to a Straddle, where generally ATM strikes are purchased.
Since the initial cost of a Strangle is cheaper than a Straddle, the returns could potentially be higher.
This strategy has a limited downside (i.e. the Call and the Put premium) and unlimited upside potential.
When can we use this strategy??
We can use this strategy when we believe
that the underlying stock / index will experience extreme volatility in
the near future.
Risk involved while using this strategy
Limited. Limited to initial premium paid for Call and Put
Benefits of using the strategy
Unlimited Profits
When do we achieve the breakeven?
• Upper Breakeven Point = Strike Price of Long Call + Net Premium Paid
• Lower Breakeven Point = Strike Price of Long Put – Net Premium Paid
Example:
Let’s assume currently Nifty is trading at 8200
We buy Rs 8000 Put for Rs. 20 and a Rs. 8400 Call for Rs. 30
Net debit taken to enter the strategy is Rs. 50, which is the maximum loss we can suffer.
Now let’s understand how we this strategy will shape up :
