Short Strangle: Options Strategy for Steady Stocks

Stock market trading strategies

The Short Strangle strategy is for stocks that are extremely STEADY or for stocks with a near term neutral outlook.

As this strategy requires shorting, it MUST be squared up intraday (preferably) unless you are reasonably certain of the price movement.

How To Play The Short Strangle Strategy

The strategy involves SELLING

(a) an out-of-the money call option at a strike price that is HIGHER than the PE you are about to short

(b) an out-of-the-money put option at a strike price that is LOWER than the shorted CE

with the same expiration date.

The idea is to eat both the premiums, or a good part of them, if the stock remains steady.

Let’s start with an example.

It’s 11 May 2018, (10 AM) and a steady stock we have identified is PowerGrid.

The CMP is 208.

The 31-5-18 205 PE is 2.50

The 31-5-18 215 CE is 1.90

Let’s SELL one lot each.

4000 units in one lot, so the total margin investment works out to:

4000 X 2.50 = 10,000

+

4000 X 1.90 = 7,600

Total = RS 17,600

It’s 12.30 PM now and the rates are:

The 31-5-18 205 PE is available at 2

The 31-5-18 215 CE is available at 2

If we book out now, our profits are:

PE – 4000 X 0.50 = 2,000

(LESS)

CE — 4000 X 0.10 = 400

Net Profit = RS 1,600

It’s 3.20 PM now and the rates are:

The 31-5-18 205 PE is available at 2.80

The 31-5-18 215 CE is available at 1.45

If we book out now, our profits are:

PE (LOSS) – 4000 X 0.30 = 1,200

(LESS)

CE — 4000 X 0.35 = 1,400

Net Profit = RS 200

Though the profits are small, you didn’t lose anything. And if the markets remain listless, you will end up making much more. This is a low risk low profits strategy so long you square up positions on the same day.

BUDGETING FOR LOSSES

Remember this – when you are shorting calls and puts, always work make a budget for losses. For example, if you are willing to lose no more than Rs 2,000 per trade, book out when your losses hit your budgets.

When to Enter Into A Short Strangle

  1. In extremely steady stocks.
  2. In stocks that are bullish on long term but with a neutral near-term outlook.
  3. In any stock that are NOT in the news.

Caution

Square up both options at the same time, preferably on the same day.

 

3 Comments on "Short Strangle: Options Strategy for Steady Stocks"

  1. channakeshav | May 11, 2018 at 12:03 pm | Reply

    Thanks Sunilji …nicely explained

  2. Correction to be made.
    Buy rate 1.90 price@3:20 pm 1.45. Difference 1.90 – 1.45 = 0.45.
    CE – 4000 x 0.045 = ₹1800

    Net Profit ₹600

  3. Rajeshs Sankaranarayanan | November 6, 2018 at 9:30 pm | Reply

    What does
    Market remains listless mean?
    You have written if market remains listless then you can make much more.

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