What is a Short Strangle option strategy?
A Short strangle is an options trading strategy in which a trader has to sell a Call option and a Put option of the same underlying asset at different strike prices but with the same expiry
Short Strangle options strategies are used when we expect a range bound movement in stocks.
When to trade in Short strangle?
A strangle strategy works on the theory that prices can move violently in either direction.
A strangle gives a chance of unlimited profitability when prices move considerably in both directions. The trader bears a maximum loss when the cash price is between the strike prices of both the options.
It makes both the options worthless on expiry and the trader has to pay the value of premiums plus commissions on both option trades in long strangle. In the short strangle the loss can be manifold.
It refers to implied volatility whether it’s the best time to buy or sell options.
- Low implied volatility provides buy/entry signal for long strangle
- High implied volatility provides a sell/entry signal for short strangle
Short strangle strategy
In the short strangle strategy, we need to sell both Call options and Put options with the same expiry date, at different strike prices and the same security.
The most suitable time to sell Call/Put options is when they are slightly out-the-money irrespective of where the security spot price moves.
The short strangle strategy involves unlimited risk, as the trader may lose up to the value of the security in case of selling both options.
When the underlying price is between the strike prices of the options the profit can be limited to the premiums received on both the options.
The Breakeven points for the short strangle strategy are:
- Upper Breakeven Point for short strangle= Short Call Option (Strike Price + Premium received
- Lower Breakeven Point for short strangle= Short Put Option (Strike Price – Premium received
The margin requirement is the short call or short put requirement (whichever is greater), plus the premium received from the other side.
How to make a short strangle Strategy?
Using the Options strategy builder in intradayscreener.com, you can easily build an option strategy for a short strangle strategy.
Step 1: You just need to select the indices and expiry date (sell both call and put options) and click on add/edit to get started.
Step 2: Click on the short strangle strategy below.
Step 3: You will get detailed information on the option strategy like Premium, Max profit at expiry, Max losses at expiry, Breakeven at expiry and a short strangle graph.
Short Strangle Options Trading Strategy Example
Let us take an example of TATA motors with strike price given in the table below.
In short strangle strategy, you need to sell out-of-the-money put and call options. In the above trade, if TATA motors is at 325, you need to sell a call option which is 335 and premium received is 19.2. Sell put option which is 315 and premium received is 13.6.
|Expected stock price||335 CE SELL||335 CE Prem recvd.||335 CE Sell Net Profits||315 PE SELL||315 PE prem recvd||315 Net PE Sell||Expected stock price||Short Strangle Payoff|
By using the calculation in the table below, we can plot the payoff diagram for short strangle.
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