This strategy is similar to Short Straddle; the only difference is of the strike prices at which the positions are built. Short Strangle involves selling of one OTM Call Option and selling of one OTM Put Option, of the same expiry date and same underlying asset. Here the probability of making profits is more as there is a spread between the two strike prices, and if
Strip Strategy is the opposite of Strap Strategy. When a trader is bearish on the market and bullish on volatility then he will implement this strategy by buying two ATM Put Options & one ATM Call Option, of the same strike price, expiry date & underlying asset. If the prices move downwards then this strategy will make more profits compared to short straddle because of the ..
Lower Break-even = Strike Price of Put - Net Premium, Upper Break-even = Strike Price of Call+ Net Premium
Upper Breakeven Point = Strike Price of Calls/Puts + Net Premium Paid, Lower Breakeven Point = Strike Price of Calls/Puts - (Net Premium Paid/2)
SHORT STRANGLE Vs STRIP - When & How to use ?
SHORT STRANGLE
STRIP
Market View
Neutral
Neutral
When to use?
This strategy is perfect in a neutral market scenario when the underlying is expected to be less volatile.
When a trader is bearish on the market and bullish on volatility then he will implement this strategy.
Action
Sell OTM Call, Sell OTM Put
Buy 1 ATM Call, Buy 2 ATM Puts
Breakeven Point
Lower Break-even = Strike Price of Put - Net Premium, Upper Break-even = Strike Price of Call+ Net Premium
Upper Breakeven Point = Strike Price of Calls/Puts + Net Premium Paid, Lower Breakeven Point = Strike Price of Calls/Puts - (Net Premium Paid/2)
SHORT STRANGLE Vs STRIP - Risk & Reward
SHORT STRANGLE
STRIP
Maximum Profit Scenario
Maximum Profit = Net Premium Received
Price of Underlying - Strike Price of Calls - Net Premium Paid OR 2 x (Strike Price of Puts - Price of Underlying) - Net Premium Paid
Maximum Loss Scenario
Loss = Price of Underlying - Strike Price of Short Call - Net Premium Received
Net Premium Paid + Commissions Paid
Risk
Unlimited
Limited
Reward
Limited
Unlimited
SHORT STRANGLE Vs STRIP - Strategy Pros & Cons
SHORT STRANGLE
STRIP
Similar Strategies
Short Straddle, Long Strangle
Strap, Short Put Ladder
Disadvantage
• Unlimited loss is associated with this strategy, not recommended for beginners. • Limited reward amount.
Expensive., The share price must change significantly to generate profit., High Bid/Offer spread can have a negative influence on the position.
Advantages
• Higher chance of profitability due to selling of OTM options. • Advantage from double time decay and a contraction in volatility. • Traders can book profit when underlying asset stays within a tight trading range.
Profit is generated when the share price changes in any direction., Limited loss., The profit is potentially unlimited when share prices are moving.