Contents

Short Strangle

Short Strangle is a neutral strategy used when you expect the price to stay within a range. It involves Selling an OTM CALL & Selling an OTM PUT.

Short Strangle has unlimited risk both on the upside and the downside. This strategy has to be used only when the implied volatility is falling from a high.

it can be used before RBI monetary policy meets and results announcements to capture volatility crush. Premiums fall significantly post these events.

The strategy is most suited for Index Options as the Index is less volatile and less risky compared to individual stocks.

Trade Set-Up

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Sell 1 OTM PUT

short put-Finvezto

Sell 1 OTM CALL

short call-Finvezto

Short Strangle

Short Strangle-Finvezto

Entry Checklist

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Market Outlook
  • When you expect price to stay within a support and a resistance
  • Volatility
  • Implied Volatility should be high and falling
  • Open Interest
  • Equal CALL & PUT build up around the support & resistance zone
  • Positional or Intraday?
  • Overnight positions are risky as the risk is unlimited
  • Better to use as an intraday strategy when you are dealing with weekly options. Start by capturing 5 points as premium decay per day in Nifty Options while trading Intraday. Once you master it, choose strikes closer to the price to capture 10 to 20 points per day.
  • Sell far Out-of-the-money options for consistent income in Monthly Index options. Protect the strangle by selling an OTM PUT to protect your position overnight.
  • Risk Profile

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    Risk [Loss]
  • Maximum Risk is unlimited both on the upside and downside
  • Reward [Profit]
  • Maximum Profit is limited to the net credit or the net premium received. Maximum profit is when price ends anywhere between the CALL and PUT strikes.
  • Break Even Point
  • The lower strike minus the net credit received
  • The higher strike plus the net credit received
  • Options Greeks Impact

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    Time Decay Impact [Theta]
  • Time decay is extremely helpful for the position.
  • Volatility impact [Vega]
  • If the implied volatility decreases after you initiate the position, then it is helpful for the position
  • If the implied volatility increases after you establish the position, then it is harmful for the position as the price of both the CALL & PUT might go up.
  • Trade Management & Exit

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    Rolling & Adjustments
  • Rolling is possible for a Short Strangle
  • When the position is going against you, exit the side which has made good profits. Then, sell a new CALL or PUT at a new strike to match the losing side. You will be converting the short strangle into a short straddle.
  • Stop Loss & Exit
  • Risk should be 1-2% of your capital
  • Exit when the price breaks above the resistance or support level or when one of the CALL or PUT becomes In-the-money