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Long Strangle-Neutral Strategy

Options-Trading-Beginners

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]

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    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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