Option Trading Strategy

Short Strangle

Nifty is range bound and the trading range is 4800-5000. Even the news about GDP couldn't break the range. Nifty may continue in this range for some more time. To take the advantage of decay in premium we can initiate short strangle.

The short strangle, also known as sell strangle, is a neutral strategy in options trading that involve the simultaneous selling of a slightly out of the money put and a slightly out of the money call of the same underlying stock and same expiration date. The short strangle option strategy is a limited profit, unlimited risk options trading strategy that is taken when the options trader thinks that the underlying stock will experience little volatility in the near term.

Here is the strategy:

Short 5000 Call option at cmp Rs.78.85

Short 4800 Put option at cmp Rs.86.60

Pay off chart

Maximum Profit     : Rs. 78.85+86.60 = 165.65

Potential Loss         : Unlimited

Lower Break Even : Lower Strike Price - Total premium

                                 4800-165.65=4634.65

Upper Break Even : Upper Strike Price+Total Premium

                                 5000+165.65=5165.65

Maximum profit will be attained if Nifty expires between 4800-5000. If Nifty trades below 4634 and above 5165. Traders are advised to exit both call and put option.

Traders should remember that this is a strategy of limited profit and potential unlimited loss.