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What is a Short Strangle? – Options Trading Strategy Explained

August 2, 2024, 11:28 pmSeptember 11, 2024 0 41372

What is a Short Strangle?

The Short Strangle is an options selling strategy where you sell both a Call and a Put option at different strike prices but with the same expiration date. The goal is to profit from the premiums collected from selling these options, while hoping that the market stays within a certain range.

Here’s a breakdown:

1. Sell a Call Option:
  - - You sell an out-of-the-money (OTM) call option, meaning the strike price of the call is higher than the current market price.
    - You profit if the price stays below this call option’s strike price.
2. Sell a Put Option:
  - - You sell an out-of-the-money (OTM) put option, meaning the strike price of the put is lower than the current market price.
    - You profit if the price stays above this put option’s strike price.

What is the Goal of a Short Strangle?

The goal is for the market to stay between the two strike prices (the call strike and the put strike). If the market doesn’t make a big move in either direction, both options will expire worthless, and you get to keep the premium you collected from selling them.

- Profit: Comes from the premiums collected for selling both options.
- Risk: If the market moves beyond either strike price (above the call strike or below the put strike), your losses can be unlimited (on the call side) or substantial (on the put side).

When to Use a Short Strangle?

You would typically use a Short Strangle strategy when you expect the market to be range-bound (not moving much in either direction) and relatively stable. This means you believe the price of the asset will stay between the strike prices of the two options you’ve sold.

- Example: If Nifty is trading at 18,000, you might sell a 19,000 Call and a 17,000 Put, collecting premiums for both. If the market stays between 17,000 and 19,000, both options expire worthless, and you keep the premiums

Profit Potential and Risk:

Maximum Profit:
The maximum profit is limited to the total premium collected when you sold the call and put options.

- For example, if you sold the 19,000 Call for ₹100 and the 17,000 Put for ₹100, your total premium collected is ₹200. This is the maximum profit you can make if Nifty stays between 17,000 and 19,000 at expiration.

Maximum Loss:
The potential loss is unlimited if the market makes a big move in either direction.

- If the market goes above 19,000, the call side will generate losses (since you are obligated to sell at the lower strike price).
- If the market goes below 17,000, the put side will generate losses (since you are obligated to buy at the higher strike price).

Example:

Let’s assume Nifty is trading at 18,000.

You execute a Short Strangle by:

1. Selling a 19,000 Call for ₹100.
2. Selling a 17,000 Put for ₹100.

- You collect ₹200 as the total premium.

Scenarios:

If Nifty stays between 17,000 and 19,000 at expiration:
Both options will expire worthless, and you keep the ₹200 premium as your profit. This is the ideal outcome.

If Nifty goes above 19,000 (say, 19,500):
The 19,000 Call will be exercised, and you will need to sell Nifty at 19,000 while it’s trading at 19,500. This results in a loss of ₹500 per unit.

- Your total loss = ₹500 (loss) – ₹200 (premium) = ₹300 loss per unit.

If Nifty goes below 17,000 (say, 16,500):
The 17,000 Put will be exercised, and you will need to buy Nifty at 17,000 while it’s trading at 16,500. This results in a loss of ₹500 per unit.

- Your total loss = ₹500 (loss) – ₹200 (premium) = ₹300 loss per unit.

Advantages of a Short Strangle:

Profit from time decay: You earn money as time passes because the value of options decreases as expiration approaches.

Double premium: Since you are selling both a call and a put, you collect two premiums at once.

Ideal for range-bound markets: Works best in markets where price movements are limited, so both options expire worthless.

Disadvantages of a Short Strangle:

Unlimited risk on the call side: If the market goes far above the call strike, your losses can be significant.

Trick and Technique To Avoid Unlimited Losses from Short Strangle

High margin requirement: You need a large margin to cover the risk of this strategy, especially because of the naked call and put exposure.

Less suitable for volatile markets: If you expect big moves in the market, this strategy can be very risky.

In Summary:

A Short Strangle is a great strategy if you expect the market to stay within a range and want to profit from time decay by collecting premiums from both a call and a put. However, it carries significant risk if the market moves sharply in either direction, so risk management is crucial.

Option Selling on NSE: A Simple Way to Earn Consistent Premiums

August 2, 2024, 10:12 pmSeptember 10, 2024 0 32141

Introduction

Option selling is a great way to make steady income on the NSE. Instead of waiting for big market moves, you can sell options and collect premium upfront. It’s a strategy that benefits from time decay, meaning the longer the option sits without action, the more money you can make. Let’s break down why it works and why traders love it on the NSE.

What is Option Selling?

When you sell an option, you’re giving someone the right to buy or sell an asset at a specific price. In return, you get paid a premium upfront. As long as the market stays within a certain range, you keep that money.

Selling a Call: You profit if the price stays below a certain level.
Selling a Put: You profit if the price stays above a certain level.

It’s simple – the less the market moves, the more you earn.

Why Traders Choose Option Selling

1. Immediate Income
You get paid right away when you sell an option. No waiting for market moves, just steady income.

2. Time is Your Friend
As time passes, options lose value due to time decay. This works in your favor as a seller, since the option becomes less likely to be exercised.

3. High Win Rate
You don’t need big price moves. As long as the market stays within a range, you win.

4. Control Risk with Spreads
You can limit your risk by using spreads, where you buy another option to protect yourself if the market moves too much.

Why the NSE is Ideal for Option Selling

High Liquidity: Options like Nifty and Bank Nifty have a lot of buyers and sellers, so trades are easy to make.Low Capital Requirement: You need less money to sell options on the NSE compared to other strategies.Risk Control: With the wide variety of options, you can set up trades that limit your risk.

Quick Benefits Recap

Benefit	What It Means
Earn Premiums	Get paid upfront for selling options.
Time Decay Advantage	The longer it takes, the more you benefit.
High Success Rate	You win as long as the market stays in a range
Risk Control with Spreads	Use spreads to cap potential losses.
Liquidity on NSE	Easy to enter and exit trades due to high market activity.

Conclusion

Option selling on the NSE is a simple and effective way to generate steady income. By collecting premiums and managing risk with spreads, you can create a reliable strategy for consistent earnings. Whether you’re new to trading or experienced, option selling offers an accessible path to profit.

Part 1: How to Count Waves Using Chart Patterns?

April 7, 2022, 5:28 pmJanuary 5, 2023 4 54157

We can count waves using traditional patterns like Head and shoulders , Double Top and Bottom,
Triangle, cup & handle, etc. This article is about how you can count waves by identifying chart patterns.

I have covered Three chart patterns in this article,
1) Triangles
2) Head and shoulders
3) Double Top and Bottom

1) Head and shoulders :

In addition, the two lows formed when the price failed to rise and fell back down were basically at the same level. The horizontal line is often referred to as the “neckline” When the price fails to fall back for the third time the neckline will break. So “head and shoulders” was officially established.

Changes in volume with head and shoulders:
During the formation of “head and shoulders”, the left shoulder has the largest volume , the Head has a slightly smaller volume , and the right shoulder has the smallest volume . The phenomenon of diminishing trading volume shows that when the stock price rises, the chasing force is getting weaker and weaker, and the price has the meaning of rising to the end.

Operation plan after the Head and shoulders appear:
When the head and shoulders formed, you can decisively follow up the short order. The formation of the head and shoulders indicates the beginning of a new round of decline in the market, and the minimum drop is the distance from the head to the neckline. The profit is very substantial. Therefore, studying the formation of the Head and Shoulders is also a necessary analysis process for band enthusiasts.

Wave Count:

The left shoulder: wave 3/A.
The first touch on the neckline: wave 4/B
Head: wave 5/C
The second touch on the neckline: wave A/1
The right shoulder: wave B/2
The ending point of the right shoulder: wave C/3

2) Triangles

These are the most commonly used triangle patterns. In this motion, we are going to understand the triangle in terms of the Elliot wave. We’ll be talking about the classical triangle pattern in an upcoming educational series.

Wave Count:

A triangle forms in corrective waves. There are Four corrective waves in Elliott wave theory. The corrective waves are 2,4, B, and X.
There are four waves in a triangle which are A, B, C, D, E.
The starting point of wave A of the triangle is the ending point of impulsive wave 1/3/A/W. After the completion of wave E of wave 1/3/A/W, the Impulsive wave will initiate.

3) Double Top/Bottom:

In the chart, you can sometimes see the stock price fluctuations. The stock price fell back after reaching the highest price. After some sorting, it rose again to near the previous stock price level and then fell back. Two “normally highs” The high point is formed on the circuit diagram and will not be seen again in the short term.

Wave Count:

In a Bull market, The first Top of the pattern represents the completion of the impulsive wave. The ending point of the Impulsive wave is the starting point of the corrective wave.
I started the wave count from the first top and labeled it as A, B, and C waves.

In a Bear Market, The first bottom of the pattern represents the completion of the impulsive wave. The ending point of the Impulsive wave is the starting point of the corrective wave.
I started the wave count from the first bottom and labeled it as A, B, and C waves.
After wave C is complete, we can ride the impulsive waves.

Understand The Cycle Of Doom To Make Winning Trades

November 21, 2021, 1:00 pmNovember 24, 2021 0 19268

I am starting this topic with a simple question,
Are you finding consistent profit in your trading? If yes, then you can skip this article, and congratulations!

Now, Let’s discuss talk about the rest of the traders.
Indeed, most traders don’t find profits consistently instead end up losing their money. It does not matter which market they trade.

There can be many reasons for not getting consistent profits.
Like, it can be risk management, trading system. It can also be trading psychology.

But the truth is, you are trapped! Ladies and gentlemen, I am showing you the numerous powerful psychological trap ever.

The Cycle of Doom

The cycle of doom involves three phases.

Phase 1: The search
Phase 2: The action
Phase 3: The blame

To become a successful trader, however, you will have to get out of the cycle of doom.
How can you destroy the cycle of doom?
First of all, you have to understand the cycle.

You need to understand what is going on! So you can identify and move beyond the Cycle of Doom in the world of consistently profitable trading.

Phase 1: The search

In this phase, you are searching forContinue reading

Quick Guide for a stock trader (Visualized)

February 12, 2016, 11:43 amApril 16, 2022 2 12605

Starting “a stock trader” is the way of money making is riskier but, we found a way from a perfect trader who really earn. There are 3 trading styles: position trading, swing trading and day trading. If other succeed in day trading, you succeed. The way to making money for you looks like this:

Timeframe of stock trader:

1. A Japanese & Korean market will open at 6 o’ clock.
2. Start watching SGX Singapore nifty from opening. This will help you to predict India market.
3. China and Hong Kong market will open at 7 o’ clock. Study it with financial new papers.
4. Note a view of other web pages and analysis.
5. Start your laptop and trading platform for pre-market.
6. You’ll see pretty volatility in market 9:15 am to 9:45 am.
7. A Trading plan is alway important, find opportunities for your trading plan matches.
8. This time is very volatile and European market also will open.
9. Examine FII and DII activities.
10. A day trader will square off their position around 3 o’ clock.
11. After closing market, making note of what went in your trading.
12. U.S. market will open at 7 clock which is important for next trading day.

Quick guide on how stock price works!

February 9, 2016, 10:37 pmApril 16, 2022 0 12487

Here is a visualization of the How stock price works!

At the most fundamental level, supply and demand in the market determine stock price.
Price times the number of shares outstanding (market capitalization) is the value of a company. Comparing just the share price of two companies is meaningless.
Theoretically, earnings are what affect investors’ valuation of a company, but there are other indicators that investors use to predict stock price. Remember, it is investors’ sentiments, attitudes and expectations that ultimately affect stock prices.
There are many theories that try to explain the way stock prices move the way they do. Unfortunately, there is no one theory that can explain everything.

Credit goes: setofskill.com