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Volatile Strategies


Volatile Strategies

Long Straddle

A Straddle is a volatility strategy and is used when the stock price / index is expected to show large movements. This strategy involves buying a call as well as put on the same stock / index for the same maturity and strike price, to take advantage of a movement in either direction, a soaring or plummeting value of the stock / index. If the price of the stock / index increases, the call is exercised while the put expires worthless and if the price of the stock / index decreases, the put is exercised, the call expires worthless.

Market Scenario : Volatile || Risk : Limited (Net Premium Paid) || Reward : Unlimited ||
BEP : Upper Break-even Point = Strike Price of LongCall + Net Premium Paid
Lower Break-even Point = Strike Price of LongPut - Net Premium Paid

Example...

Spot Price 5100

Strategy Strike Price Premium
Buy Call 5000 137
Buy Put 5000 70

Upper BEP = 5000 + 207 = 5207 || Lower BEP = 5000 - 207 = 4793

On exit if....

Spot Price Call Payoff Put Payoff Stratgy Payoff
4600 -137 330 193
4700 -137 230 93
4793 -137 137 0
4800 -137 130 -7
4900 -137 30 -107
5000 -137 -70 -207
5100 -37 -70 -107
5200 -63 -70 -7
5207 70 -70 0
5300 163 -70 93
5400 263 -70 193


Long Stranglet

Short Strangle involves the simultaneous buying of a slightly out-of-the-money (OTM) put and a slightly out-of-the-money (OTM) call of the same underlying and expiration date. Strangle strategies are suggested over straddle because strangle is low cost strategy.

Market Scenario : Neutral (Movement is Range Bound)
Risk : Limited to net premium paid | || Reward:Unlimited ||
BEP : UPPER BEP : Call Strike + Net Premium
LOWER BEP : Put Strike – Net Premium

Example...

Spot Price 5000

Strategy Strike Price Premium
Buy Call 5100 50
Buy Put 4900 40

Upper BEP = 5100 + 90 = 5190 || Lower BEP = 5100 - 90 = 4810

On exit if....

Spot Price Call Payoff Put Payoff Stratgy Payoff
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 Call Butterfly

Buy 2 ATM Call, Sell 1 ITM Call, Sell 1 OTM Call)

A ShortCallButterfly is a strategy for volatile markets. It is the opposite of LongCallButterfly, which is a range bound strategy. The ShortCallButterfly can be constructed by Selling one lower striking in-the-money Call, buying two at-the-money Calls and selling another higher strike out-of-the-money Call, giving the investor a net credit (therefore it is an income strategy). There should be equal distance between each strike. The resulting position will be profitable in case there is a big move in the stock / index.

Market Scenario : ou are neutral on market direction and bullish on volatility.

Risk : Limited {net difference between the adjacent strikes (Rs. 100 in this example) – premium}
Reward : Limited to the net premium received
BEP : Upper BEP = Strike Price of Highest Strike ShortCall - Net Premium Received
Lower BEP = Strike Price of Lowest Strike LongCall + Net Premium Received

Example...

Spot Price 15000

Strategy Strike Price Premium
Sell 1 ITMCall 14900 122
Buy 2 ATMCall 15000 80 X 2 = 160
Sell 1 OTMCall 15100 41

Upper BEP = 15100 - 3 = 15097 || Lower BEP = 14900 + 3 = 14903

On exit if....

Spot Price ITM Call Payofff ATM Call Payoff OTM Call Payoff Stratgy Payoff
14700 122 -160 41 3
14800 122 -160 41 3
14900 122 -160 41 3
14903 119 -160 41 0
15000 22 -160 41 -97
15097 -75 34 41 0
15100 -78 40 41 3
15200 -178 240 -59 3
15300 -278 440 -159 3


Short Put Butterfly​

(Buy 2 ATMPut, Sell 1 ITMPut, Sell 1 OTMPut)

A ShortPutButterfly is a strategy for volatile markets. It is the opposite of LongPutButterfly, which is a range bound strategy. The ShortPutButterfly can be constructed by Selling one lower striking in-the-money Put, buying two at-the-money put and selling another higher strike out-of-the-money Put, giving the investor a net credit (therefore it is an income strategy). There should be equal distance between each strike. The resulting position will be profitable in case there is a big move in the stock / index.

Market Scenario : You are neutral on market direction and bullish on volatility.​

Risk : Limited {net difference between the adjacent strikes (Rs. 100 in this example) – premium}

Reward : Limited to the net premium received

BEP : Upper BEP = Strike Price of Highest Strike ShortPut - Net Premium Received
Lower BEP = Strike Price of Lowest Strike LongPut + Net Premium Received

Example...

Spot Price 15000

Strategy Strike Price Premium
Sell 1 ITMPut 15100 121
Buy 2 ATMPut 15000 80 X 2 = 160
Sell 1 OTMCall 14900 42

Upper BEP = 15100 - 3 = 15097 || Lower BEP = 14900 + 3 = 14903

On exit if....

Spot Price ITM Call Payofff ATM Call Payoff OTM Call Payoff Stratgy Payoff
14700 -279 440 -158 3
14800 -179 240 -58 3
14900 -79 -40 42 3
14903 -76 34 42 0
15000 -21 -160 42 -97
15097 118 -160 42 0
15100 121 -160 42 3
15200 121 -160 42 3
15300 121 -160 42 3



Short Call Condor​

(Sell 1 ITMCall {Lower Strike}, Buy 1 ITMCall Option {Lower Middle Strike}, Buy 1 OTMCall Option {Higher Middle Strike} and Sell 1 OTMCall Option {Higher Strike}).

A ShortCallCondor is very similar to a Shortbutterfly strategy. The difference is that the two middle bought options have different strikes.

Market Scenario : Market will cross range but not sure in which direction.

Risk : Limited

Reward : limited ||

Upper BEP : Upper BEP = Highest Strike - Net Premium
Lower BEP : ( Lower BEP = Lowest Strike + Net Premium​

Example...

Spot Price 15000

Strategy Strike Price Premium
Sell 1 ITMCall 14800 284
Buy 1 ITMCall 14900 221
Buy 1 OTMCall 15100 124
Sell 1 OTMCall 15200 90

Upper BEP = 15200 - 29 = 15171 || Lower BEP = 14800 + 29 = 14829

On exit if...

Spot Price Sell ITM Buy ITM Buy OTM Sell OTM Stratgy Payoff
14700 284 -221 -124 90 29
14800 284 -221 -124 90 29
14829 255 -221 -124 90 0
14900 184 -192 -124 90 -71
15000 84 -221 -124 90 -71
15100 -16 -21 -124 90 -71
15171 -87 50 -53 90 0
15200 -116 79 -24 90 29
15300 216 179 76 -10 29


Short Put Condor​

(Sell 1 ITMPut {Lower Strike}, Buy 1 ITMPut {Lower Middle Strike}, Buy 1 OTMPut {Higher Middle Strike} and Sell 1 OTMPut Option {Higher Strike}).

A ShortPutCondor is very similar to a Shortbutterfly strategy. The difference is that the two middle bought options have different strikes.

Market Scenario : Market will cross range but not sure in which direction.

Risk : Limited

Reward : limited

BEP : Upper BEP = Highest Strike - Net Premium
BEP : Lower BEP = Lowest Strike + Net Premium​

Example...

Spot Price 15000

Strategy Strike Price Premium
Sell 1 ITMPut 15200 284
Buy 1 ITMPut 15100 221
Buy 1 OTMPut 14900 124
Sell 1 OTMPut 14800 90

Upper BEP = 15200 - 29 = 15171 || Lower BEP = 14800 + 29 = 14829

On exit if....

Spot Price Sell ITM Buy ITM Buy OTM Sell OTM Stratgy Payoff
14700 -216 179 +76 -10 29
14800 -116 79 -24 90 29
14829 -84 50 -53 90 0
14900 -16 -21 -124 90 -71
15000 84 -221 -124 90 -71
15100 184 -121 -124 90 -71
15171 255 -221 -124 90 0
15200 284 -221 -124 90 29
15300 284 -221 -124 90 29







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