Short Strangle

A short strangle is a position that is a neutral strategy that profits when the stock stays between the short strikes as time passes, as well as any decreases in implied volatility. The short strangle is an undefined risk option strategy.

Short Strangle

Right now NIFTY 50 Index is moving range bound.

Directional Assumption: Neutral

Setup:
– Sell OTM Call
– Sell OTM Put

Ideal Implied Volatility Environment: High

Here we can hence sell NIFTY July 10000 CE and NIFTY July 9850 PE but assuming the market will revert from the current resistance we can also sell NIFTY July 9950 CE and NIFTY July 9800 PE for our bearish assumption.

The NIFTY spot price is at 9915.25.

To be safer we can choose strike prices from August and choose NIFTY August 10200 CE and NIFTY July 9600 PE.

But you may ask now why I chose 300 points’ spread? 9900 + 300 = 10200 and 9900 – 300 = 9600. Basically, when it is about the choice of next expiry I am looking at a higher timeframe of the daily chart. It is consolidating right now and I am thinking of a short term correction before it goes up further.

Nifty 50

Then you will ask why I am betting 9600; why not 9700 or 9500 and make it a 200 point spread instead of 300 points.

That part comes from Fibonacci –
Nifty50

My bet is on 61.8% retracement.
But anyway, that will be a long time for us to allow us to get profited for the theta.

Short Strangle

Max Profit: Credit received from opening trade.

Our lot size is 75.

Credit from short put = 36.7 point ~ 36.7 * 75 INR
Credit from short call = 39.25 point ~ 39.25 * 75 INR

Initial Credit (IC)

= Total Premium Received
= Max Profit
= (36.7 + 39.25) point
= (36.7 + 39.25) * 75 INR
= 5696.25 INR

How to Calculate Breakeven(s):
– Downside: Subtract total credit from the short put
– Upside: Add total credit to the short call

Hence the downside is = 9600 – 75.95 = 9524.05 (This is called LBE i.e. Lower BreakEven Point)
Hence the upside is = 10200 + 75.95 = 10275.95 (This is called UBE i.e. Upper BreakEven Point)

So we make money as long as it stays between 9524.05 and 10275.95

Implied volatility (IV) plays a huge role in our strike selection with straddles. The higher the IV, the more credit we will receive from selling the options. A higher credit ultimately means we will have wider breakeven points since we can use the credit to offset losses we may see to the upside or downside. At the end of the day, a larger relative credit results in a higher probability of success with this strategy.

IV gets insanely higher on results days’ of scrips or other fundamental events making it an amazing opportunity for strangle.

The first profit target is generally 50% of the maximum profit.

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