A trader shorts or writes a Call Option when he feels that underlying stock price is likely to go down. Selling Call Option is a strategy preferred for experienced traders.
However this strategy is very risky in nature. If the stock rallies on the upside, your risk becomes potentially unquantifiable and unlimited. If the strategy
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 ..
Lower Break-even = Strike Price of Put - Net Premium, Upper Break-even = Strike Price of Call+ Net Premium
SHORT CALL Vs SHORT STRANGLE - When & How to use ?
SHORT CALL
SHORT STRANGLE
Market View
Bearish
Neutral
When to use?
It is an aggressive strategy and involves huge risks. It should be used only in case where trader is certain about the bearish market view on the underlying.
This strategy is perfect in a neutral market scenario when the underlying is expected to be less volatile.
Action
Sell or Write Call Option
Sell OTM Call, Sell OTM Put
Breakeven Point
Strike Price of Short Call + Premium Received
Lower Break-even = Strike Price of Put - Net Premium, Upper Break-even = Strike Price of Call+ Net Premium
SHORT CALL Vs SHORT STRANGLE - Risk & Reward
SHORT CALL
SHORT STRANGLE
Maximum Profit Scenario
Max Profit = Premium Received
Maximum Profit = Net Premium Received
Maximum Loss Scenario
Loss Occurs When Price of Underlying > Strike Price of Short Call + Premium Received
Loss = Price of Underlying - Strike Price of Short Call - Net Premium Received
Risk
Unlimited
Unlimited
Reward
Limited
Limited
SHORT CALL Vs SHORT STRANGLE - Strategy Pros & Cons
SHORT CALL
SHORT STRANGLE
Similar Strategies
Covered Put, Covered Calls
Short Straddle, Long Strangle
Disadvantage
• Unlimited risk to the upside underlying stocks. • Potential loss more than the premium collected.
• Unlimited loss is associated with this strategy, not recommended for beginners. • Limited reward amount.
Advantages
• With the help of this strategy, traders can book profit from falling prices in the underlying asset. • Less investment, more profit. • Traders can book profit when underlying stock price fall, move sideways or rise by a small amount.
• 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.
