Thread by @muskk

(Thread) A quick note on strangles

If you are selling strangles in a bullish, low vol environment keep the following in mind:

Assuming you entered a delta-neutral strangle on an index(Nifty/Bnf), any further upmove on the index will change delta of the strangle, i.e. making
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it -ve, rapidly and more likely to hit SL on the call side. Given vols are already low at entry further decrease in vols contributing to call delta getting supressed is immaterial, i.e. vanna impact is low (check post below on vanna in general), and so
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https://twitter.com/muskk/status/1462088598124068868?s=20

call delta will mostly only depend on index moves. In other words, your PnL doesn't have a buffer from vanna effect and is exposed solely to index moves and how good is your SL strategy. The Pnl's movement isn't smooth and adjustments become difficult.
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Your risk is now on the "view" you have of index' next move (i.e. you're in the prediction zone!) and your SL strategy.

Compare this to a scenario when a strangle was entered at high vol and index turns bullish leading to vols coming down (btw spot going up & IV coming down
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is not always the case but most of the time is). In this case call side delta increase from index upmove will be suppressed by vanna effect significantly (unless index moves high rapidly) and so you've got a cushion/buffer to be able to react/adjust the strangle
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and PnL moves smoothly. In this case put side will give better +ve Pnl than the one in low vol scenario as it's sold at high delta (delta of OTMs higher at high vol) and index made an up move i.e. entry is at higher +ve delta and spot makes an upmove hence higher PnL.

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