Thread by @Raghunath_TL

In this thread, I will talk about common options strategies and their advantages and disadvantages in the context of the Indian market.

I will keep adding to the thread over time.

If the trader has a view that the market is sideways, the most commonly employed options strategies are Short Strangle, Short Straddle, Iron Condor and Iron Butterly Strategies which are delta-neutral strategies. All these are net credit strategies but require high margins.

These strategies are called delta-neutral strategies because the net delta (an option greek) or positional delta of these strategies is closer to zero.

The delta of the put option or put spread offsets the delta of a call option or call spread and thus making them delta neutral.

Short Strangle involves selling an out of the money call at a higher strike and an out of the money put at a lower strike.

It has a higher Probability of Profit (from here on called POP)- anywhere from 60%-90% depending on the strikes chosen.

It is an undefined risk strategy.

Short Strangle is ideally entered when the underlying option contract has 45 to 30 DTE (days to expiry).

Should ideally exit a short strangle when 50% of the max profit is achieved or 1 week before the expiry to avoid the gamma effect in the last week of expiry.

Short Strangle is delta neutral and

Theta +ve - it will gain as time passes& underlying doesn't change much

Gamma -ve - When high, strangle can lose quickly if there is adverse price action in underlying in one direction

Vega -ve - an increase in volatility affects adversely

Due to the larger profit zone in short strangles, it allows you to be wrong in your view for a large part of the time and still be profitable.

It should be ideally done at the high implied volatility (IV) conditions when options premiums are rich.

The expectation of the trader who put on short strangles is that the stock/index stays within the profit zone and doesn't test the short strike price or the breakeven till its expiry or pay-off date chosen.

Here is how a typical strangle looks like

Because of the larger profit zone, short strangles also requires fewer adjustments if the trade goes against you.

Adjustment is done by rolling up or rolling down of the untested side when one or the other strike/breakeven gets tested by the stock/index.

Since short strangle involves 2 legs, it has minimal transaction charges and impact cost compared to three or more legged strategies.

Due to its undefined risk nature and high margin requirement, it's not recommended for beginners.

Things to keep in mind when placing Short Strangle

1) You have a view of sideways movement in underlying
2) Underlying high IV at the start
3) Be ready to adjust or exit the trade when a breakeven gets tested
4) Understand the undefined risk nature of the strategy