Wednesday, October 3, 2012

Short Strangle (Sell OTM Call + Sell OTM Put)


Short Strangle (Sell OTM Call + Sell OTM Put)

Short Strangle involves the simultaneous selling of a slightly out-of-the-money (OTM) put and an out-of-the-money (OTM) call of the same underlying stock and expiration date.

Market Scenario: Neutral (Movement is Range Bound)

Risk: Unlimited

Reward: Limited to total premium received

BEP:   UPPER BEP: Call Strike + Net Premium
            LOWER BEP: Put Strike – Net Premium
EXAMPLE:
Entry:
SPOT
5000


STRIKE
PREMIUM
SELL CALL
5100
50
SELL PUT
4900
40

UPPER BEP: 5100 + 90 = 5190                                LOWER BEP: 4900 – 90 = 4810
On Exit if:
SPOT
CALL PAY-OFF
PUT PAY-OFF
STRATEGY PAY-OFF
4700
50
-160
-110
4800
50
-60
-10
4810
50
-50
0
4900
50
40
90
5000
50
40
90
5100
50
40
90
5190
-40
40
0
5200
-50
40
-10
5300
-150
40
-110


Short Strangle - Strategy Pay-Off






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