Contents

Long Strangle

Long Strangle is used when you expect a big move in the stock or index, but you are not sure of the direction. It involves buying a put option and a call option at different OTM strike prices

Buying a CALL and a PUT at the same time will increase the total cost of the position. It will take a huge move in the stock or index for you to break even. This is one of the positions which will wipe off your trading account slowly and steadily. Do not initiate this position unless you are extremely sure that the stock or index is set for a big move. Please read through the entry checklist below before using this strategy. The value of CALLs and PUTs will decay very quickly as time decay is the biggest enemy of this position.

Trade this strategy only when the implied volatility (India VIX) is low. Also, it is better to trade this strategy intraday than overnight as the decay overnight is significant in weekly options.

Look out for stocks which have upcoming results and enter into them 2 weeks before result is announced and exit an hour before results are announced as volatility crush will destroy the premiums.

Trade Set-Up

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Buy a CALL at an OTM Strike

Naked Call 1-Finvezto

Buy a PUT at an OTM strike

Naked Put-Finvezto

Long Strangle

Long Strangle-Finvezto

Illustration Using Nifty Options

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Long Straddle-Finvezto
Snapshot from Upstox.com Strategy Builder

In the pay-off graph above, the price of the underlying asset (Nifty) is plotted in the X-Axis and the profit/loss is plotted in the Y-Axis.

The black line with dots indicates the profit or loss at different prices of the underlying asset.

The region shaded in green indicates profitable zone and the region shaded in grey indicates loss zone.

A positive number (75 = Buy 1 lot) in the Quantity column indicates a Buy position and a negative number (-75 = Sell 1 lot) indicates a Sell position.

Entry Checklist

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Market Outlook
  • Only when you expect a huge move in the stock or the index
  • Lookout for stocks which are about to release results in the next 2 weeks. The volatility will go up in the last 1 or 2 weeks.
  • Look for Bollinger band squeeze or consolidation chart patterns
  • Volatility
  • Buy long strangle only when the volatility is low and on the rise
  • Open Interest
  • Look for scenarios where the CALLs sold are significantly higher than the PUTs sold or vice-versa
  • Positional or Intraday?
  • Hold overnight positions only in monthly options. Overnight decay is lesser
  • In weekly options, only hold intra -day positions as time decay in weekly options is significant overnight
  • Risk Profile

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    Risk [Loss]
  • Maximum Risk is limited to the premium paid for the CALL and PUT
  • Reward [Profit]
  • Maximum profit is unlimited in theory. In practice, most of the time, the value of a long strangle decays quickly. The probabilities of profit are very low.
  • Break Even Point
  • The Strike Price of the CALL plus the net debit on the upside. Net debit is the total premium paid.
  • Strike price of the PUT minus the net debit on the downside
  • Options Greeks Impact

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    Time Decay Impact [Theta]
  • Time decay is extremely harmful for the position. This strategy is the worst affected by time decay.
  • Volatility impact [Vega]
  • When the Volatility increases immediately after deploying the strategy, it is helpful for the position
  • Volatility crush is harmful for the position
  • Trade Management & Exit

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    Rolling & Adjustments
  • Rolling not applicable for net debit positions. Exit with stop loss.
  • Stop Loss & Exit
  • If you are holding monthly options, you should exit at least 2 weeks before expiry as the decay in premium is high in the last 2 weeks
  • If you are trading weekly options, exit when your loss is 1-2% of your capital or within an hour of entering the position.
  • If you enter a long strangle, then there will be around 3 to 5 points decay in Nifty options every hour depending on the OTM strike
  • Do not hold a long strangle more than an hour in weekly options
  • Set Stop Loss at 1-2% of your capital. Do not overleverage.