Option Trading Strategies? Sounds difficult? Already worried? Well, don’t worry! We’ll help you break this down easily.
Here, we will discuss the Options Strangle Strategy (Short Strangle vs Long Strangle)

Options Trading Strategies

Option trading strategies use simple, “one-legged” orders to complex “multi-legged” orders. But simple or complex, what all strategies have in common is that they are based on two fundamental option types: CALL and PUT.

Strangle
Strangle is an options strategy where you can buy (or sell) a CALL and PUT with the same expiry date but with a different strike price.

Let us understand these strategies one by one.

1. 1. Short Strangle (Sell Strangle)

   2. Long Strangle (Buy Strangle)

Also, check Options Straddle Strategy (Short Straddle vs Long Straddle)

The automated version of this strategy is readily available at Myalgomate Marketplace as Time Based Options Straddle/Options  Strangle.

Short Strangle (Sell Strangle) Options Trading Strategy

The Short Strangle (or Sell Strangle) is a neutral strategy wherein a Slightly OTM Call and a Slightly OTM Put Options are sold simultaneously of the same underlying asset and expiry date.

This strategy can be used when the trader expects that the underlying stock will experience very little volatility in the near term.

It is a limited profit and unlimited risk strategy. The maximum profit earn is the net premium received. The maximum loss is achieved when the underlying moves either significantly upwards or downwards at expiration.

A net credit is taken to enter into this strategy. For this reason, the Short Strangles are Credit Spreads.

The usual Short Strangle Strategy looks like as below for NIFTY current index value at 18000 (NIFTY Spot Price):

Suppose Nifty is currently at 18000 and you expect not much movement in near future. In such a scenario, you can execute a short strangle strategy by selling Nifty Put and Call at 17800 and 18200. The net premium received will be your maximum profit while the loss will depend on how high or low the index moves.

What about Theta (Time) Decay? 

Theta decay for a short strangle is highly beneficial.

Regardless of the direction the underlying asset moves, time premium will come out of the short options. For every trading day that passes until expiration, sellers of the call and put options in a short strangle will collect time premium.

Important Tips for Selling Strangles

Short strangles seem to combine the best of both worlds when selling options. If the underlying asset moves up slightly, moves down slightly, or stays the same, traders will make money.

Something to watch out for with short strangles is sharp increases in volatility or huge, unexpected moves in the price of the underlying. Usually, these two events go hand in hand. If either event occurs, the losses for the short strangle options strategy can be severe.

Long Strangle (Buy Strangle) Options Trading Strategy

The Long Strangle (or Buy Strangle or Option Strangle) is a neutral strategy wherein Slightly OTM Put Options and Slightly OTM Call are bought simultaneously with the same underlying asset and expiry date.

This strategy can be used when the trader expects that the underlying stock will experience significant volatility in the near term.

It is a limited risk and unlimited reward strategy. The maximum loss is the net premium paid while maximum profit is achieved when the underlying moves either significantly upwards or downwards at expiration.

The usual Long Strangle Strategy looks like as below for NIFTY current index value at 18000 (NIFTY Spot Price):

Suppose Nifty is currently at 18000 and due to some upcoming events you expect the price to move sharply but are unsure about the direction. In such a scenario, you can execute a long strangle strategy by buying Nifty Put at 17800 and buying Nifty Call at 18200. The net premium paid will be your maximum loss while the profit will depend on how high or low the index moves.

What about Theta (Time) Decay? 

Theta decay is very detrimental to a long strangle because there are two long options positions. As expiration approaches, the long call and long put components of a long strangle are going to decrease in value solely due to time premium decay. Timing is critical for making money with long strangles.

Important Tips for Buying Strangles

For the most part, traders use the long strangle option strategy when they anticipate large movements in an underlying asset, but they just don’t know whether the movements will be up or down. The long strangle is a popular strategy to deploy on individual stocks, often before earnings reports. Individual stocks seem to have more upside and downside risk than other assets, like indices.

Not only will a long strangle benefit from significant up or down moves in the underlying, but it will also benefit from spikes in volatility. This is very important to be aware of upon order entry.  Calls and puts become more expensive when volatility increases.

Because a long strangle doesn’t involve any short options positions, the risk is limited and very conservative relative to the maximum potential profit. As far as trading options go, strangles are one of the most conservative strategies due to the defined risk.

Comparison: Long Strangle (Buy Strangle) Vs Short Strangle (Sell Strangle)

	Long Strangle (Buy Strangle)	Short Strangle (Sell Strangle)
About Strategy	The Long Strangle (or Buy Strangle or Option Strangle) is a neutral strategy wherein Slightly OTM Put Options and Slightly OTM Call are bought simultaneously with the same underlying asset and expiry date. This strategy can be used when the trader expects that the underlying stock will experience significant volatility in the near term.	The Short Strangle (or Sell Strangle) is a neutral strategy wherein a Slightly OTM Call and a Slightly OTM Put Options are sold simultaneously of the same underlying asset and expiry date. This strategy can be used when the trader expects that the underlying stock will experience very little volatility in the near term.
Market View	Neutral	Neutral
Strategy Level	Beginners	Advance
Options Type	Call + Put	Call + Put
Number of Positions	2	2
Risk Profile	Limited	Unlimited
Reward Profile	Unlimited	Limited
Breakeven Point	2 Breakeven points	2 Breakeven points

What’s Next?

I hope you enjoyed reading about algorithmic trading strategies.

check out our next blog on Detailed information on Options Straddle Strategy (Short Straddle vs Long Straddle)

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