Short Strangle Options Strategy helps you make money if market is in consolidation mode or there is lack of movement in either direction. So if you think market will not give big movement in either direction then this is the strategy that will help you.
This technique is combination of two other techniques which we have already discussed. So in case you have missed those articles then you can go through them first before reading this one. Below is the link to those two articles
Note you need to have more money in your account because of Span margin and Exposure margin requirements as you are selling the options here instead of buying. For Short Strangle you need to keep below points in mind for effectively creating it
- Sell Out of money OTM Call option
- Sell Out of money OTM Put option
- Both Call and Put options should be of same expiry
- Both trades should be taken on same instrument
This option strategy is similar to Short Straddle with some differences and opposite of the Long Strangle strategy we discussed before this one. You can explore these two strategies if not done already to understand the difference and understanding the scenario when to effectively use which technique.
You can watch either the English Video or Hindi Video to understand the strategy in details.If you are new to Options trading then I would suggest you to watch or read the Getting Started tutorial on Options . That will help you understand the strategies as well.The videos will explain you
- When to use the strategy?
- What is profit and loss potential of the strategy?
- Margin requirement of the strategy
- Explanation of technique with Nifty example
English Video
Hindi Video
Conclusion
This strategy should not be used in trending market as you may incur huge loss in that case. You should select the strike prices for which you are selling in such way that market remains in that range. It should not get out of those ranges. So to protect yourself from loss you can select far out of money options but in that case your profit potential will also come down.
This is the trade off you need to think of while creating this strategy. Also less volatile stocks are one way to trade using the strategy. Based on the data of last 15 years you can select the stocks which are less volatile and have less beta that is dependence on index and its movement. Such stocks will be better suited for this strategy as the loss incurred will be less as movement will be less in those instruments.
This is high risk and low profit strategy and should be exercised with caution as it may blow your account if there is high movement on the stock. So you should exercise this technique with extreme caution. The margin requirement is also high in this scenario as you are selling the options. So you need to keep these points in mind before using the technique.