Arjun Trader

A short strangle is an options trading strategy designed to generate income in stable market conditions. It involves selling an out-of-the-money (OTM) call option and an OTM put option with the same expiration date on the same underlying asset. This strategy profits from the premiums received from selling these options, provided the underlying asset’s price remains between the two strike prices until expiration.

How the Short Strangle Strategy Works

1. Sell an OTM Call Option: This is a call option with a strike price higher than the current market price of the underlying asset.
2. Sell an OTM Put Option: This is a put option with a strike price lower than the current market price.

By selling both options, the trader collects premiums from the buyers. The maximum profit is limited to the total premiums received, which occurs if the underlying asset’s price stays between the two strike prices at expiration. However, if the price moves significantly beyond either strike price, potential losses can be substantial.

Practical Example Using NIFTY

As of February 13, 2025, the NIFTY 50 index is trading at approximately 23,031.40.

To implement a short strangle:

• Sell a 23,500 Call Option: This strike price is above the current NIFTY level, making it out-of-the-money.
• Sell a 22,500 Put Option: This strike price is below the current NIFTY level, also out-of-the-money.

Assume the premiums received are as follows:

• 23,500 Call Option Premium: ₹50
• 22,500 Put Option Premium: ₹60

Total Premium Received = ₹50 (Call) + ₹60 (Put) = ₹110

Profit and Loss Scenarios

1. If NIFTY remains between 22,500 and 23,500 at expiration: Both options expire worthless, and the trader retains the total premium of ₹110 as profit.
2. If NIFTY rises above 23,500: The call option becomes in-the-money. For every point above 23,500, the trader incurs a loss, offset by the ₹110 premium received. For example, if NIFTY expires at 23,600:
   • Loss from Call Option: 23,600 – 23,500 = ₹100
   • Net Profit/Loss: ₹110 (Premium) – ₹100 (Loss) = ₹10 Profit
3. If NIFTY falls below 22,500: The put option becomes in-the-money. For every point below 22,500, the trader incurs a loss, offset by the ₹110 premium received. For example, if NIFTY expires at 22,400:
   • Loss from Put Option: 22,500 – 22,400 = ₹100
   • Net Profit/Loss: ₹110 (Premium) – ₹100 (Loss) = ₹10 Profit

Breakeven Points

• Upper Breakeven: 23,500 (Call Strike) + ₹110 (Total Premium) = 23,610
• Lower Breakeven: 22,500 (Put Strike) – ₹110 (Total Premium) = 22,390

If NIFTY’s price at expiration is between these breakeven points, the strategy remains profitable.

Considerations

• Risk Management: While the maximum profit is limited to the premiums received, potential losses are unlimited if NIFTY moves significantly beyond the strike prices. It’s essential to monitor the position and have a risk management plan in place.
• Market Outlook: This strategy is best suited for traders who anticipate low volatility in the NIFTY index during the option’s lifespan.
• Margin Requirements: Selling naked options requires substantial margin, as potential losses can be significant. Ensure you have sufficient capital to maintain the position.

The short strangle can be an effective strategy for generating regular income in stable market conditions. However, due to the inherent risks, it’s crucial to thoroughly understand the strategy and implement appropriate risk management techniques.