Short Strangle

A Short Strangle is a slight modification to the Short Straddle. It tries to improve the profitability of the trade for the Seller of the options by widening the breakeven points so that there is a much greater movement required in the underlying stock / index, for the Call and Put option to be worth exercising. This strategy involves the simultaneous selling of a slightly out-of-the-money (OTM) put and a slightly out-of-the-money (OTM) call of the same underlying stock and expiration date. This typically means that since OTM call and put are sold, the net credit received by the seller is less as compared to a Short Straddle, but the break even points are also widened. The underlying stock has to move significantly for the Call and the Put to be worth exercising. If the underlying stock does not show much of a movement, the seller of the Strangle gets to keep the Premium.

When to Use: This options trading strategy is taken when the options investor thinks that the underlying stock will experience little volatility in the near term.

Risk: Unlimited

Reward: Limited to the premium received

Breakeven: · Upper Breakeven Point = Strike Price of Short Call + Net Premium Received

Lower Breakeven Point = Strike Price of Short

Example

Suppose Nifty is at 4500 in May. An investor, Mr. A, executes a Short Strangle by selling a Rs. 4300 Nifty Put for a premium of Rs. 23 and a Rs. 4700 Nifty Call for Rs 43. The net credit is Rs. 66, which is also his maximum possible gain.

Short Strangle
Strategy : Sell OTM Put + Sell OTM Call
Nifty index Current Value 4500
Buy Call Option Strike Price (Rs.) 4700
Mr. A pays Premium (Rs.) 43
Break Even Point (Rs.) 4766
Buy Put Option Strike Price (Rs.) 4300
Mr. A pays Premium (Rs.) 23
Break Even Point (Rs.) 4234

To view Practical examples of Short Strangle Option Trading Strategies

Courtesy – NSE India

  • amar

    NICE ARTICLE… I WANT To view Practical examples of Short Strangle Option Trading Strategies. PLEASE PROVIDE IT…

    • Dear Mr. Amar,
      Thanks for reading our article and your comment.
      Practically, short strangle is bit risky strategy and you have to be more sure shot in the market,otherwise you have bear huge losses. We prefer Long strangle at times, if at all we initiate any short strangle than we’ll surely share on the site, which you will find it on the same page only.
      Keep visiting. Thanks