Short Strangle

Short Strangle A Profitable Option Strategy You Must Know

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Short strangle

Short strangle is a neutral trading strategy. In this strategy the trader sells out of the money call option and put option of the same underlying and the same expiration.

The Strategy

Short strangle is constructed by simultaneously selling an out of the money call option and out of the money put option. I presume that you have the basic knowledge on options. If no then please read our post “option Greeks“. Though it is considered as high risk and limited profit strategy, you can apply it most of the times. But you need to be cautious while the market is trending either ways. Here the trader is trying to collect the premium of the sold out contract. You will get the amount credited to your account as soon as you sell the strangle.If the price of underlying stays in between both the strike prize, the premium of the option contract will erode and become zero on the expiry day.

How do you construct a short Strangle

Today’s Nifty Spot – 8726




In order to construct Short strangle you will

  • Sell Nifty Sep 9000 CE for 18.70
  • Sell Nifty Sep 8400 PE for 16.25

What is your Risk

Even though it is a risky strategy the maximum loss incurred is always grater than the maximum profit earned for a wrong trade. But you can apply this strategy for 80 % of time to extract 2%-3% gains.

What is your reward

It is a limited profit limited loss strategy. The maximum gain you receive will be difference of Total  premium receive by selling contracts – total cost for purchasing contracts.
(18.7+16.26 ) x 75 = 2621.25.

Example




I am attaching the scree shot of my open position screen where I have constructed a short strangle. The first two transaction represent a short strangle. Third one is an extra position I have added later, kindly ignore it. Here you can see I am in profits of Rs.6363 as of today and I have constructed the position in last week. My target is to keep this position until expiry to get the full value. You also can apply similar strategies to earn an extra monthly income. If you have any doubts please feel to contact me on my email subhash@aarvis.in

Short Strangle

Payoff Diagram

Short Strangle

Hope this article helped you … Kindly post your comments and suggestions..




 

 

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