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Short Strangle (Sell Strangle) Options Trading Strategy Explained

Published on Thursday, April 19, 2018 | Modified on Wednesday, June 5, 2019

Short Strangle (Sell Strangle)

Short Strangle (Sell Strangle) Options Strategy

Strategy LevelAdvance
Instruments TradedCall + Put
Number of Positions2
Market ViewNeutral
Risk ProfileUnlimited
Reward ProfileLimited
Breakeven Pointtwo break-even points

The Short Strangle (or Sell Strangle) is a neutral strategy wherein a Slightly OTM Call and a Slightly OTM Put Options are sold simultaneously of same underlying asset and expiry date.

This strategy can be used when the trader expects that the underlying stock will experience a very little volatility in the near term.

It is a limited profit and unlimited risk strategy. The maximum profit earn is the net premium received. The maximum loss is achieved when the underlying moves either significantly upwards or downwards at expiration.

A net credit is taken to enter into this strategy. For this reason, the Short Strangles are Credit Spreads.

The usual Short Strangle Strategy looks like as below for NIFTY current index value at 10400 (NIFTY Spot Price):

Short Strangle Orders
OrdersNIFTY Strike Price
Sell 1 Slightly OTM PutNIFTY18APR10200PE
Buy 1 Slightly OTM CallNIFTY18APR10600CE

Suppose Nifty is currently at 10400 and you expect not much movement in near future. In such a scenario, you can execute short strangle strategy by selling Nifty Put and Call at 10200 and at 10600. The net premium received will be your maximum profit while the loss will depend on how high or low the index moves.

When to use Short Strangle (Sell Strangle) strategy?

The Short Strangle is perfect in a neutral market scenario when the underlying is expected to be less volatile.

Example

Example 1 - Stock Options

Let's take a simple example of a stock trading at ₹40 (spot price) in June. The option contracts for this stock are available at the premium of:

  • July 35 Put - ₹1
  • July 45 Call - ₹1

Lot size: 100 shares in 1 lot

  1. Sell 'July 35 Put': 100*1 = 100
  2. Sell 'July 45 Call': 100*1 = 100

Net Credit: ₹100 + ₹100 = ₹200

Now let's discuss the possible scenarios:

Scenario 1: Stock price remains unchanged at ₹40

  • July 35 Put - Expires worthless
  • July 45 Call - Expires worthless
  • Net Credit was ₹200 initially recieved.
  • Total Loss = ₹200

The total loss of ₹200 is also the maximum loss in this strategy. This is the amount you received as premium at the time you enter in the trade.

Scenario 2: Stock price goes above ₹50

  • July 35 Put - Expires worthless
  • July 45 Call Expires in-the-money with an intrinsic value of (50-45)*100 = ₹500
  • Net Credit was ₹200 initially recieved.
  • Total Loss = ₹500 - ₹200 = ₹300

Scenario 3: Stock price goes down to ₹30

  • July 35 Put Expires in-the-money with an intrinsic value of (35-30)*100 = ₹500
  • July 45 Call - Expires worthless
  • Net Credit was ₹200 initially recieved.
  • Total Loss = ₹500 - ₹200 = ₹300

Example 2 - Bank Nifty

Long Strangle Example Bank Nifty
Bank Nifty Spot Price8900
Bank Nifty Lot Size25
Long Strangle Options Strategy
Strike Price(₹)Premium(₹)Total Premium Paid(₹)
(Premium * lot size 25)
Sell 1 OTM Call90002005000
Sell 1 OTM Put88001002500
Net Premium (200+100)3007500
Upper Breakeven(₹)Strike price of Call + Net Premium
(9000 + 300)
9300
Lower Breakeven(₹)Strike price of put - Net Premium
(8800 - 300)
8500
Maximum Possible Profit (₹)Net Premium Recieved7500
Maximum Possible Loss (₹)Unlimited
On Expiry Bank NIFTY closes atNet Payoff from 1 OTM Call Sold (₹) @9000Net Payoff from 1 OTM Put Sold (₹) @8800Net Payoff (₹)
80005000-17500-12500
83005000-10000-5000
85005000-50000
9000500025007500
9300-250025000
9500-75002500-5000
9800-150002500-12500
short strangle example bank nifty

Market View - Neutral

When you are expecting little volatility and movement in the price of the underlying.

Actions

  • Sell OTM Call
  • Sell OTM Put

Sell 1 out-of-the-money put and sell 1 out-of-the-money call which belongs to same underlying asset and has the same expiry date.

Breakeven Point

two break-even points

A strangle has two break-even points.

Lower Break-even = Strike Price of Put - Net Premium

Upper Break-even = Strike Price of Call+ Net Premium"

Risk Profile of Short Strangle (Sell Strangle)

Unlimited

The maximum loss is unlimited in this strategy. You will incur losses when the price of the underlying moves significantly either upwards or downwards at expiration.

Loss = Price of Underlying - Strike Price of Short Call - Net Premium Received

Or

Loss = Strike Price of Short Put - Price of Underlying - Net Premium Received

Reward Profile of Short Strangle (Sell Strangle)

Limited

For maximum profit, the price of the underlying on expiration date must trade between the strike prices of the options. The maximum profit is limited to the net premium received while selling the Options.

Maximum Profit = Net Premium Received

Max Profit Scenario of Short Strangle (Sell Strangle)

Both Option not exercised

Max Loss Scenario of Short Strangle (Sell Strangle)

One Option exercised

Advantage of Short Strangle (Sell Strangle)

The strategy offers higher chance of profitability in comparison to Short Straddle due to selling of OTM Options.

Disadvantage of Short Strangle (Sell Strangle)

Limited reward with high risk exposure.

How to exit?

  • Wait for Options to expire and retain the premium received.
  • Reverse the trade by buying back the Options sold

Simillar Strategies

Short Straddle, Long Strangle

1 Comments

Rando
1. Rando  Jul 25, 2020 07:22 I Like It. | I Don't Like It. | Report Abuse Reply
in the first example with the stock option, why do you say the max loss is 200 when that's the premium received hence a gain?.








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