The month of January was extremely turbulent for the market as a result of several major events occurring or falling into place in quick succession. Starting with the Hindusberg Adani saga, which was a major event until the Adani FPO was fully subscribed, followed by two major and significant events, namely the current administration's final budget of 2023-2024 and the day after the Federal Reserve meeting, in which James Powell will set the market tune on interest rate hikes.
Markets have remained quiet volatile in the January trading sessions, with the Nifty and Sensex dropping approximately 2.5% and 2%, respectively. After the aforementioned occurrence, many traders in the F&O segment may be seeking for a profitable strategy. According to a research conducted by a well-known American investment firm, a trader can profit by being active in the bond market a week before and after the Federal Reserve meeting. Similarly, we believe volatility will decrease ahead of the Union Budget. If a trader believes volatility will decline in the following week, he or she might use a short strangle approach.
Below mentioned is a Short Strangle Option Strategy,
Setup of the strategy
Sell 9-Feb 18400 Call at premium of Rs 27
Sell 9-Feb 17200 Put at premium of Rs 38
Short Strangle Option Strategy
When the investor has a neutral market stance and expects relatively little volatility in the underlying asset price in the near future, the short strangle option strategy can be employed. The method involves a fixed profit and an infinite risk. The reward is restricted to the premiums earned, and the risk of loss is high. A call and put option are shorted (sold) at the same underlying, same expiry, but different strike price to implement a short strangle strategy, exactly as the short straddle strategy. To maximise profits from this strategy, the underlying asset's price change should not be more than the price movement of the shorted options.
Because the breakeven marks are wider apart than in a comparable straddle, there is a better possibility of maintaining the premium received. If there is a distance between the breakeven, the premium received and maximum profit potential for selling one strangle is lower than for one straddle.
Maximum profit at expiry will be Rs 3285 and Maximum loss is theoretically unlimited. Probability of profit at expiry stands at 89%. You can trade Short strangle Algo Strategy through Moneysukh on the AlgoBulls platform or make readymade short strangle through Traderadar.