Option Strategies Tutorial: When to Initiate Long Strangles?

As discussed in the Option Volatility Strategies Webinar, Long Strangle option strategies are not frequently used trading strategies due to the nature of premium decay in options. Long Strangles can be initiated when the trader is expecting a sudden surprise price action (most during events) or strongly implied volatility pickup, Near to Expiry with potential Gamma price action moves.

Long Strangles can also be initiated when the markets are griding for a longer period of time and traders started giving up on the trend and sidelined to the sideways market. Too much of choppiness in the trend sidelines the directional trader. Those are the places option premium comes at a cheaper price and at the same time expiry days to nearing one of the good zones to test for long volatility bets in the markets.

Dead volatility zones plus frustrating sideways markets are one of the good places to look for low risk – high reward bets. One of the best things about long strangles is limited risk with unlimited reward. At the same time, it matters that acquiring the long strangle at the lowest possible cost. And hence near to expiry with dead volatility is a great combo for any possible surprise during a limited period of time.

With the current context in Nifty which is running in sideways mode since 31st Oct 2019 and November month being trading in a sideways between 11800-12050 range (i.e 250 point range) is considered as one of the lowest trading range with the given spot range.

Nifty Historical volatility is below sub 9 levels indicating volatility is completely dead. On the other hand, ATM CE IV’s around 9 and ATM PE IV around 12.57 again confirming that volatility is dead and so the cheaper option premiums.

Looking into the scenario combination of 11850PE’s and 12050CE’s offer cheaper bets on return to volatility with breakeven points coming around 11788-12111 levels. The strategy will be profitable if volatility is likely to return with the price either hitting ATH on or before expiry or if 11800 key support level on downside is likely to break with strong volatility.

Here is the Option Expiry what if scenario – If Nifty Expires in the range between 11500-12500 range what could be the profitability scenario.

Net premium cost of Long Strangles (Rs61) is cheaper compared to the 11900 long Straddle at this juncture which currently costs Rs 135.

When to Enter Strandles

Always wait for the Trigger to happen. Let say if price opens inside the previous days range then possibly it could lose option premium on both the call side and put side. In that wait for the trigger anywhere between 60-65. Let the total spread rise above key threshold levels and validate your view about the markets.

One should also be dynamically ready to change the trigger value based on the changing market dynamics.

One can also monitor the spread by using the Straddle & Long Strangle Option Spread AFL code in Amibroker

When to Exit Strangles
1)If there is a surprise move then the trader has to consider trailing their stops or Exit at their own discretion.
2)If the price opens inside the range and starts trading inside the range. Then the trader should consider a pre-determined time-based stop or a fixed spread based stop.