Updated: Jun 11, 2021
Options trading is becoming a contemporary approach in the Indian trading community, especially after introducing Weekly Options in indices.
You can try many variations and methods in options trading; below are the classification of options strategies; refer to the below image.
Here is a thing, having worked on many combinations & strategies, I have found that Short straddle and Short strangle are the simplest yet highly rewardable options strategies. Especially for intraday trading.
let's dive in understand more about straddle and strangles,
We have been conditioned about options writing, saying that it carries unlimited risk'; it's not safe to write the options. Still, you need to understand that time decay is the primary advantage of this strategy. You know that time decay is inevitable!
Short Straddle is a combination of two ATM strikes of both CE & PE, and as the name implies, one need to short ATM CE & PE of the same expiry at the same time to construct the short straddle.
Let me give you an example, and show you how its P&L behaves across various scenarios.
Here is an example, consider BANKNIFTY is in 22662. If you round off this number to strike difference, which is 100 in the BANKNIFTY case, then it is 22700 strike ATM. The option premiums are as follows –
22700 CE is trading at 346.95
22700 PE is trading at 419.65
So we need to short both these options simultaneously, so let's assume we shorted both at 346 + 419 = 765.
The primary thing to consider is that we short the same strike, the same expiry simultaneously.
Now, let's understand what happens to the profit and loss in different cases.
Case 1 – Market expires at 21500 In this case, the put option gives a loss even after the premium we have collected here. Below is the outcome of this scenario
22700CE will expire at zero as it is OTM on expiry; hence, we benefit from complete premium as profit, i.e., 346 points
22700PE will have an intrinsic value of 1200 points. If we reduce PE's premium, then we will get the outcome here, 419-700 = -781 Points
The net outline would be 781-346 = – 435 Points
As the CE gain has erased by the loss of the PE option, we made a loss of -435 points in this case.
Case 2 – Market expires at 21935
It's a breakeven scenario, let's see,
22700CE would expire as OTM; hence the premium received is a profit. The profit here is 346 points.
22700PE would have an intrinsic value of 765, in which we have collected 419 as a premium. Hence our loss would be 765 – 419 = -346
The profit of the call option is equivalent to the loss of put options. Therefore we neither make money nor lose money here.
Case 3 – Market expires at 22700
It is the most fruitful point for the straddle. At 22700, both the call and put option would expire as OTM, and therefore the premium received from both the call and put option will be a profit. We make a profit of 765 points.
So this means that you make maximum money in a short straddle when the markets don't move from the ATM strike!
So, the PnL varies as and when the spot varies compared to the strike price entered. Refer to the below image to get clarity on the payoff of the strategy.
The short strangle is similar to the straddle except for the strike selection. Compared to straddle, it is a more conservative approach, and winning chances are high in this approach.
Here instead of ATM strikes, we select OTM strikes of the same expiry, and as usual, we short it simultaneously.
For example, Let's consider the straddle scenario only where the spot was 22662; in this case, the OTM CE starts from 22700+. Similarly, OTM PE starts from 22600.
Below is the payoff chart of this approach.
As I mentioned earlier, one can try different variations for straddles and strangles. As per my experience, these are the two simple yet powerful methods for successful options strategies, either for day trading or positional trading. The interesting part here is that trader no need to predict the market directions.
If you can create rules around these concepts, there is a fair possibility of making consistent profits irrespective of the market environments.
Here are the real trade result of these strategies (Not the backtested results),
Learn more about systematic / Rule-Based trading: https://www.tradingwithnataraj.com/courses
Options are excellent tools as it provides a wide variety of combinations and also opportunities. There is nothing as of right or wrong approach in the market. One must create or form rules and plan then stick with them for the long run with a disciplined approach.
And also, risk and money management play's a crucial role in trading.
Well, I hope this blog helped you. If you like the content, hit the like button and share it with your trading friends.
If you have any questions, kindly post them in the comment :)
Happy Trading 😎
Wishing you most and more,
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