Lecture no 28 strangle
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The document discusses the strangle trading strategy, which involves buying out-of-the-money (OTM) puts and calls to profit from significant stock price movements while limiting risk. It highlights the importance of timing, volatility, and the impact of time decay, emphasizing that traders should exit positions before the final month to avoid losses. Advantages include capped risks and unlimited profit potential, but significant stock movement is necessary for profitability.
![Context - Strangle
Effect of Time Decay
Time decay is harmful to the Strangle. Never keep a Strangle into
the last month to expiration because this is when time decay
accelerates the fastest.
Time Period to Trade
We want to combine safety with prudence on cost. Therefore the
optimum time period to trade Strangles
Breakeven Down = [Strike - net debit]
Breakeven Up = [Strike - net debit]](https://image.slidesharecdn.com/lectureno28-strangle-200703114906/85/Lecture-no-28-strangle-7-320.jpg)
Lecture no 28 strangle
- 1. Lecture No 28 Strangle Rohan Sharma (Coach)
- 2. Basics Concepts – Strangle Proficiency - Intermediate Direction – Neutral Volatility - High Asset Leg – Long Put + Long Call Max Risk - Limited Max Reward - Unlimited Capital Gain Strategies
- 3. Description – Strangle The Strangle is a simple adjustment to the Straddle to make it slightly cheaper. Instead of buying ATM options, we buy OTM calls and puts, which creates a lower cost basis and therefore potentially higher returns. The risk we run with a Strangle is that the break evens can be pushed further apart which is bad. We simply buy lower strike puts and higher strike calls with the same expiration date so that we can profit from the stock soaring up or plummeting down.
- 4. Description – Strangle The closer we get to expiration, the less time value there is in the option. Time decay accelerates exponentially during the last time before expiration Buy OTM strike puts, preferably months to expiration. Buy OTM strike calls with the same expiration.
- 5. Context - Strangle Outlook With strangles, your outlook is direction neutral. You are looking for increasing volatility with the stock price moving explosively in either direction. Rationale To execute a neutral trade for a capital gain while expecting a surge in volatility. Ideally you are looking for a scenario where Implied Volatility is currently very low, giving you low option prices, but the stock is about to make an explosive move—you just don’t know which direction.
- 6. Context - Strangle Net Position This is a net debit transaction because you have bought calls and puts. Your maximum risk on the trade itself is limited to the net debit of the bought calls and puts. Your maximum reward is potentially unlimited.
- 7. Context - Strangle Effect of Time Decay Time decay is harmful to the Strangle. Never keep a Strangle into the last month to expiration because this is when time decay accelerates the fastest. Time Period to Trade We want to combine safety with prudence on cost. Therefore the optimum time period to trade Strangles Breakeven Down = [Strike - net debit] Breakeven Up = [Strike - net debit]
- 8. Steps to Trading a Strangle Steps In Actively seek chart patterns that appear like pennant formations, signifying a consolidating price pattern. Try to concentrate on stocks with news events an earnings reports about to happen within two weeks. Choose a stock price range you feel comfortable with.
- 9. Steps to Trading a Strangle Steps Out Manage your position according to the rules defined in your Trading Plan. Exit either a few days after the news event occurs where there is no movement or after the news event where there has been profitable movement. If the stock thrusts up, sell the call (making a profit for the entire position) and wait for a retracement to profit from the put. If the stock thrusts down, sell the put (making a profit for the entire position) and wait for a retracement to profit from the call. Try to avoid holding into the last month; otherwise, you’ll be exposed to serious time decay.
- 10. Exiting the Trade - Strangle Exiting the Position With this strategy, you can simply unravel the spread by selling your calls and puts. You can also exit only your profitable leg of the trade and hope that the stock retraces to favor the unprofitable side later on. Mitigating a Loss Sell the position if you have only one month left to expiration. Do not hold on, hoping for the best, because you risk losing your entire stake.
- 11. Advantages and Disadvantages Advantages Profit from a volatile stock moving in either direction. Capped risk Uncapped profit potential if the stock moves. Cheaper than a Straddle. Disadvantages Significant movement of the stock and option prices is required to make a profit. Bid/Ask Spread can adversely affect the quality of the trade. Psychologically demanding strategy.
- 12. Real Time Example Rohan Sharma (Coach)
- 13. Price Movement Position on Charts Rohan Sharma (Coach)
- 15. Example – Strangle Market Behavior Nifty Option /Future Buy OTM Call & Put Action (Long/ Short) Both Price Movement Expectation Breakout (High Volatility) Spot Price 11700 Strike Price (Long Call) 11800 Premium 60 Strike Price ( Long Put) 11600 Premium 65 Break Even (Up) Higher Strike + Net Debit (11800 + 125) = 11925 Breakeven (Down) Lower Strike – Net Debit (11600 – 125) = 11475 Time to Expiry Start/Mid of the Month Position of Price in Charts At Absolute Bottom / Absolute Top /BreakOut Max Risk Limited Max Reward UnLimited
- 16. Strangle Strike Price Long Call 11800 Premium 60 Strike Price Long Put 11600 Premium 65 Nifty at Expiry Long Call BEP - 11860 Long Put BEP – 11535 Total P&L 12300 440 -65 375 12100 240 -65 175 11900 40 -65 -25 11800 -60 -65 -125 11700 -60 -65 -125 11600 -60 -65 -125 11500 -60 35 -25 11400 -60 135 75 11200 -60 335 275 11000 -60 535 475