Introduction
Straddles can be expensive. A slightly less expensive, but more bullish strategy is the strangle. Instead of ATMs in the case of the straddles, you buy a slightly OTM (out-of-the-money) put and a slightly OTM call.
May NIFTY 6750/6800 Long Strangle
With the NIFTY trading at ~6780, you buy the 6750 Put and the 6800 Call.
Strangles have a wider break-evens than straddles. So they are bigger bullish call on volatility than straddles. In this case, the break-evens are 6188.50 are 7361.50
Exiting the trade
Just like in straddles, time is not your friend here. You can either exit the trade right before the event occurs – when implied volatility is at its highest or soon after the event (irrespective of the magnitude of the movement.)
The lack of liquidity means that you are forced to put this trade on closer to expiry and that is exactly the time when θ-decay is at its highest. And the wider break-evens mean that movement in the underlying has to be larger for the trade to work.
Related articles
- Long Straddle (stockviz.biz)
- Forensics: NIFTY Options – Theta(θ) Decay (stockviz.biz)
- Forensics: NIFTY Options – Implied Volatility(IV) (stockviz.biz)
