When volatility is very high, and the market has just made a dramatic move and you are expecting it to consolidate and take some time to digest its gains, you might consider selling a strangle. When you observe the past days of Open Interest Action then you could definitely get the clue that calls are being written at 5300CE and 5400CE and Puts are being written at 4900PE ,5000PE and also market also showed a dramatic move on the upper side. So there is a possibility of nifty remain in a range between 5000-5300 zone range or 5100-5400 range. So a Nifty Sell Strangle comes into my picture while observing the current open interest scenario.
Why do we sell a strangle?
When we sell a Strangle, the put and call that we sell are normally on over-priced options that are out-the- money. We consider doing this after a dramatic move in the market, when we are expecting it to consolidate the move and digest its gains before moving again. Because of the dramatic move that was made, volatility is high, making the options we sell very expensive. Then as the market consolidates, volatility decreases and lowers the price of the options. Decay also works in our favor with this position.
Currently 5300CE is Rs45.75 and 5200PE around Rs91 so there is a possibility of getting a maximum profit of Rs 6837= [(45.75+91)*50] if nifty expires between 5200-5300 with the lower protection breakeven point 5063.25 and upper protection breakeven point 5436 in nifty. And your position is safe until nifty between the breakeven pts 5063-5436.
And here are the list of profit/loss at different expiry levels
[TABLE=10]
5300 pe did not come below 100……….
@Rani,
Its a typo err…. It selling 5200PE and 5300CE. got corrected and thanks for pointing out
SOLD 5300 CALL AT 35, 2 LOTS AND SOLD 5200PE AT91 1 LOT MAY SEREIES …. YESTERDAY……..LETS C…
5200PE AT 130 NOW
@Rani
Great… You need to exit from the 5200PE position if Nifty closes below 5050 on EOD basis.
what should i do exit???
from 5200 pe?