Delta and Vega
Both straddles and strangles are similar strategies, therefore the Greeks have a similar effect on strangle and straddles.
Since we chose strikes that are equidistant from ATM, both the CE and PE should have a delta of roughly 0.3 or less. By adding the two deltas, we can gain an insight into how the overall position’s deltas behaves.
I assumed 0.3 for simplicity, though the two deltas may vary to a certain degree so we wouldn’t be perfectly delta neutral. Nonetheless, they won’t be high enough to give a directional bias to this strategy. Overall, the combined delta still gives us a directionally neutral outcome.
Volatility has the same effect on straddles and strangles. I’d suggest you check out Chapter 10, section 10.3 for a better understanding of its impact on strangles.
To summarize the effect of Greeks on strangles –
It’s clear why it is important to set up long strangles around major market events; we have already discussed this. If you need more insight, I recommend reading Chapter 10.
– Short Strangle
A short strangle is the opposite of a long strangle. To put it in motion, you need to sell OTM Call and Put options equidistant from an ATM strike. This manoeuvre will bring about the opposite results as when one goes long on a strangle. Let’s not delve into expiry details since it’s likely you have gotten comfortable with understanding the payoffs.
For the short strangle example, I employed the same strikes as I did for the long strangle.
This strategy can generate a loss when the market swings in either direction. It does remain profitable between upper and lower breakeven points though. Bear in mind –
In simple terms, you’ll be able to pocket 60 points if the market remains in between the two trading limits, 7640 and 8160. I firmly believe this is an amazing option for traders. Generally, markets stay within bounded ranges which serve as great trading prospects.
Think about stocks in a trading range that form double and triple tops or bottoms. Writing strangles outside their upper and lower range is one approach. Keep an eye out for possible breakouts or breakdowns as well.
I recall often arranging this trade in Reliance a few years back – it remained range-bound between 850 and 1000 for extended intervals.
As you can notice –
The breakeven point for a long strangle, that we discussed previously, is the same as the calculation for the breakeven point.