Explanation
A long Strangle is in many ways similar to a long Straddle option strategy. While executing a Strangle, a trader will buy one out-of-the-moneycall option and one out-of-the-money put option, of same expiry date and of the same underlying asset. As the trader move toward OTM strikes, the costfor entering into the contract willstart decreasing. Volatility required for strangle to make profits should be more than the volatility required for straddle to make profits.It is a cheaper option strategy as compared to straddle, when the trader sees volatility in market.The strategy will make profit if market volatility increases and closed above the breakeven point.In case of low volatility a trader will lose his entire investment i.e. the premium paid for buying the options.
Risk:
Limited
Reward:
Unlimited
Construction
Buy 1 OTM Call Option
Buy1OTM Put Option
| Option Type | Expiry Date | Strike Price | LTP | Action | No. Of Lots |
| PUT | 27/04/2023 | 17750.0 | 35.05 | Buy | 1 |
| CALL | 27/04/2023 | 17850.0 | 30.85 | Buy | 1 |
| Max Risk | Max Reward | Lower Break Even | Upper Break Even |
| 65.9 | Unlimited | 17784.1 | 17815.9 |
| Market Expiry | Payoff 1 | Payoff 2 | Net Premium | Option PayOff At Expiry |
| 17400.0 | 350.0 | 0.0 | -65.9 | 284.1 |
| 17450.0 | 300.0 | 0.0 | -65.9 | 234.1 |
| 17500.0 | 250.0 | 0.0 | -65.9 | 184.1 |
| 17550.0 | 200.0 | 0.0 | -65.9 | 134.1 |
| 17600.0 | 150.0 | 0.0 | -65.9 | 84.1 |
| 17650.0 | 100.0 | 0.0 | -65.9 | 34.1 |
| 17700.0 | 50.0 | 0.0 | -65.9 | -15.9 |
| 17750.0 | 0.0 | 0.0 | -65.9 | -65.9 |
| 17800.0 | 0.0 | 0.0 | -65.9 | -65.9 |
| 17850.0 | 0.0 | 0.0 | -65.9 | -65.9 |
| 17900.0 | 0.0 | 50.0 | -65.9 | -15.9 |
| 17950.0 | 0.0 | 100.0 | -65.9 | 34.1 |
| 18000.0 | 0.0 | 150.0 | -65.9 | 84.1 |
| 18050.0 | 0.0 | 200.0 | -65.9 | 134.1 |
| 18100.0 | 0.0 | 250.0 | -65.9 | 184.1 |
| 18150.0 | 0.0 | 300.0 | -65.9 | 234.1 |
| 18200.0 | 0.0 | 350.0 | -65.9 | 284.1 |
Payoff Chart
Example
Suppose the Nifty is trading at 17800 levels. The trader sees significantly volatility in the market. He think so implementing long strangle options strategy because he wants to earn more by investing less capital and limit his risk at same time in case the market doesn’t move as per expectation.
He buys one 17850 OTM Call Option for a premium of Rs. 30 & buys one 17750 OTM Put Option for a premium of Rs. 35. His net investment will be Rs. 3250. [(30 + 35)*50]
Scenario1:
if at expiry market prices out the trader expectation and expires at17600,thena traderwillmakeaprofit ofRs. 4250.[{(17750 – 17600 - 35)-(30)}*50]
Scenario2:
in case the trader expectation proved to be wrong and market indices remained in a range then the total los would be equal to the net premium paid, i.e. 3250.
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