Hi Friends,
I hope you are doing great. Last week we
discussed one of my favourite strategies Long Strangle. Our strategy is
more or less similar but totally opposite to Long Strangle. Today’s
strategy is Short Strangle. It can also be a blessing if you can execute
it properly. So without waiting any further let’s discuss the Strategy.
Short Strangle
This strategy involves the selling 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.
In this strategy, since OTM call and put
are sold, the breakeven 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 can we use this strategy??
We can use this strategy when we believe
that the underlying stock / index will experience very little
volatility in near future.
Risk involved while using this strategy
Unlimited
Benefits of using the strategy
Limited Profits
When do we achieve the breakeven?
- Upper Breakeven Point = Strike Price of Short Call + Net Premium Paid
- Lower Breakeven Point = Strike Price of Short Put – Net Premium Paid
Example:
Let’s assume currently Nifty is trading at 8200
We sell Rs 8000 Put for Rs. 20 and a Rs. 8400 Call for Rs. 30
Net credit taken to enter the strategy is Rs. 50, which is the maximum gain we can get.
Now let’s understand how we this strategy will shape up:
