How to make Profit in a Sideways Market: Short Strangle strategy
28 Mar 2017
Nilesh Jain
How to make Profit in a Sideways Market: Short Strangle strategy
A Short Strangle strategy consists of one short call with higher strike price and one
short put with lower strike price. It is established for a net credit and generates profit
only when the underlying stock expires between two strikes sold. Every day that passes
without large movement in the underlying assets will benefit this strategy due to time
erosion. Volatility is a vital factor and it can adversely affect a trader’s profits
in case it goes up.
When to initiate a Short Strangle strategy?
A Short Strangle strategy should only be used when you are very confident that the
security won’t move in either direction because the potential loss can be substantial
if that happens. This strategy can also be used by advanced traders when the implied
volatility goes abnormally high and the call and put premiums may be overvalued. After
initiating Short Strangle, the idea is to wait for implied volatility to drop and close
the position at a profit. Inversely, this strategy can lead to losses in case the implied
volatility rises even if the stock price remains at same level.
How to construct a Short Strangle strategy?
A Short Strangle strategy is implemented by selling Out-the-Money Call option and
simultaneously selling Out-the-Money Put option of the same underlying security with the
same expiry. Strike price can be customized as per convenience of the trader but the call
and put strikes must be equidistant from the spot price.
Strategy |
Sell OTM Call and Sell OTM Put |
Market Outlook |
Neutral or very little volatility |
Motive |
Earn income from selling option premium |
Upper Breakeven |
Strike price of short call + Net Premium received |
Lower Breakeven |
Strike price of short put - Net Premium received |
Risk |
Unlimited |
Reward |
Limited to Net Premium received (when
underlying assets expires in the range of call and put strikes sold) |
Margin required |
Yes |
Let’s try to understand with an example:
Nifty Current spot price Rs |
8800 |
Sell OTM Call Strike Price Rs |
9000 |
Premium Received (per share) Rs |
40 |
Sell OTM Put Strike price Rs |
8600 |
Premium Received (per share) Rs |
30 |
Upper breakeven |
9070 |
Lower breakeven |
8530 |
Lot Size |
75 |
Suppose Nifty is trading at 8800. An investor, Mr A is expecting very
little movement in the market, so he enters a Short Strangle by selling 9000 call strike
at Rs 40 and 8800 put for Rs 30. The net upfront premium received to initiate this trade
is Rs 70, which is also the maximum possible reward. Since this strategy is initiated with
a view of no movement in the underlying security, the loss can be substantial when there
is significant movement in the underlying security. The maximum profit will be limited to
the upfront premium received, which is around Rs 5250 (70*75) in the example cited above.
Another way by which this strategy can be profitable is when the implied volatility falls.
For the ease of understanding, we did not take into account commission charges.
Following is the payoff chart and payoff schedule assuming different scenarios of expiry.
The Payoff Chart:

The Payoff Schedule:
On Expiry NIFTY closes at |
Net Payoff from Call Buy (Rs) |
Net Payoff from Put Buy (Rs) |
Net Payoff (Rs) |
8300 |
40 |
-270 |
-230 |
8400 |
40 |
-170 |
-130 |
8500 |
40 |
-70 |
-30 |
8530 |
40 |
-40 |
0 |
8600 |
40 |
30 |
70 |
8700 |
40 |
30 |
70 |
8800 |
40 |
30 |
70 |
8900 |
40 |
30 |
70 |
9000 |
40 |
30 |
70 |
9070 |
-30 |
30 |
0 |
9100 |
-60 |
30 |
-30 |
9200 |
-160 |
30 |
-130 |
9300 |
-260 |
30 |
-230 |
Impact of option Greeks:
Delta: A Short Strangle has near-zero delta. Delta estimates how much an option
price will change as the stock price changes. When the stock price trades between the
upper and lower wings of Short Strangle, call Delta will drop towards zero and put Delta
will rise towards zero as the expiration date draws nearer.
Vega: A Short Strangle has a negative Vega. This means all other things remain the
same, increase in implied volatility will have a negative impact.
Theta: With the passage of time, all other things remain same, Theta will have a
positive impact on the strategy, because option premium will erode as the expiration dates
draws nearer.
Gamma: Gamma estimates how much the Delta of a position changes as the stock prices
changes. Gamma of the Short Strangle position will be negative as we are short on options
and any major movement on either side will affect the profitability of the strategy.
How to manage risk?
Since this strategy is exposed to unlimited risk, it is advisable not to carry
overnight positions. Also, one should always strictly adhere to Stop Loss in order to
restrict losses.
Analysis of Short Strangle strategy:
A Short Strangle strategy is the combination of short call and
short put and it mainly profits from Theta i.e. time decay factor if the price of the
security remains relatively stable. This strategy is not recommended for amateur/beginner
traders, because the potential losses can be substantial and it requires advanced
knowledge of trading.