- Short strangle is one of the most used trading strategies that the traders will often deploy to get a profit from the sideways market.
- Adjustments in all the short strangle strategies will play a crucial role because it is almost impossible to get the profit from the short strangle without any sort of adjustments.
What is a short-strangle strategy?
- In a short strangle strategy, we will sell out-of-the-money call options and out-of-the-money put options with the mere intention of making a profit from the theta decay.
- For example, suppose nifty is at 17,000; in order to initiate a short strangle in this scenario, we can sell 17,200 CE options and 16,800 GE.
- Generally, during a short straddle, we will maintain a median distance between the spot price and out-of-money options strike price.
- As we move closer to the expiry, theta decay will increase, and so on a Wednesday and a Thursday, there is a greater chance of theta decay.
- On the other hand, there is a less theta decay on Friday and Monday as compared to the other trading days.
How to decide which strike price to sell while initiating a short straddle strategy?
- Choosing the correct strike price is one of the most difficult as well as an important task while deploying this strategy.
- While choosing the correct strike price, we should refer to the options chain data, and we also need to look at the pricing of the money short straddle.
- For example, if nifty is at 17,000 and if at the money call option and put options both are trading around 100, then the short straddle will offer around 100+100= Rs. 200 on both sides.
- So whenever you are deploying a short straddle, you should make sure that you will take the position above that range.
- So when the market will make a move, you will be able to get sufficient time to adjust your position, as is also the case when the market will make a move in either direction.
Various ways to adjust the short straddle
- As there are adjustments in the short straddle, there are also various ways through which you will be able to adjust the short straddle.
- There are different ways to adjust the short straddle, but it will also depend from trader to trader as well as the risk appetite of every trader.
Here are some of the various ways to adjust the short straddle:
Taking risk off from the losing side
- In this method, we will move the losing option away from the strike price so that we will be able to get additional buffer.
- By using this method, we will have to shift to a lower strike price that will also result in a lesser credit.
Taking additional credit from the winning side
- In this case, we will move the winning option closer to the strike price so that we will be able to get an additional premium.
- This will be possible when we move our winning leg closer to the expiry.
Converting a short strangle into a short straddle
- This adjustment can be very risky at times but will also come with good rewards.
- In this method, we will square off both the positions and sell at the money call as well as at the money put with the same expiry.
- This method will be generally applied when we are very close to the expiry so as to get maximum theta decay.
Conclusion
One most important thing to understand here is that adjustments should not be made while deploying this strategy because each and every adjustment is a bad trade.
Frequently Asked Questions (FAQs)
Q1) How to profit from the short strangle?
A short strangle is profitable if the price of the underlying remains within the strike price at expiration
Q2) What is a short strangle strategy?
Short strangle will involve selling a call with a higher strike price and then selling a put with a lower strike price.
Q3) What is the success rate of the short strangle option strategy?
53.24% is the success rate of the short strangle option strategy.
Q4) How to set the stop loss for a short strangle?
This strategy has a stop loss on both legs of 20%.
Q5) Which option strategy is most profitable?
Long straddle is the most profitable option strategy.
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