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Range Bound Strategies


Range Bound Strategies

Short Straddle

A ShortStraddle is the opposite of Long Straddle. It is a strategy to be adopted when the investor feels the market will not show much movement. He sells a Call and a Put on the same stock/index for the same maturity and strike price. It creates a net income for the investor. If the stock /index do not move much in either direction, the investor retains the Premium as neither the Call nor the Put will be exercised. However, incase the stock / index moves in either direction, up or down significantly, the investor’s losses can be significant. So this is a risky strategy and should be carefully adopted and only when the expected volatility in the market is limited..

Market Scenario : Less Volatile || Risk : UnLimited || Reward : Limited to the Premium Received
BEP : Upper Break-even Point = Strike Price of ShortCall + Net Premium Received
Lower Break-even Point = Strike Price of ShortPut - Net Premium Received

Example...

Spot Price 5100

Strategy Strike Price Premium
Sell Call 5000 122
Sell Put 5000 85

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

On exit if....

Spot Price Call Payoff Put Payoff Strategy Payoff
4600 122 -315 -193
4700 122 -215 -93
4793 122 -122 0
4800 122 -115 7
4900 122 -15 107
5000 122 85 207
5100 122 85 107
5200 -78 85 7
5207 -85 85 0
5300 -178 85 -93
5400 -278 85 -193


Short Strangle

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 : Unl​imited || Reward : limited to net premium received
BEP : UPPER BEP : Call Strike + Net Premium
LOWER BEP : Put Strike – Net Premium

Example...

Spot Price 5000

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

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

On exit if....

Spot Price Call Payoff Put Payoff Strategy 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



Long Call Butterfly

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

A LongCallButterfly is to be adopted when the investor is expecting very little movement in the stock price / index. The investor is looking to gain from low volatility at a low cost. The strategy offers a good risk / reward ratio, together with low cost. The strategy can be done by selling 2 ATM Calls, buying 1 ITMCall, and buying 1 OTMCall Options.

Market Scenario : When the investor is neutral on market direction and bearish on volatility.

Risk : Net premium paid

Reward : Limited (Difference between adjacent strikes - net debit)

BEP : Upper BEP = Strike Price of Highest Strike LongCall - Net Premium Paid
Lower BEP = Strike Price of Lowest Strike LongCall + Net Premium Paid

Example...

Spot Price 15000

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


Long Put Butterfly

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

A LongPutButterfly is to be adopted when the investor is expecting very little movement in the stock price / index. The investor is looking to gain from low volatility at a low cost. The strategy offers a good risk / reward ratio, together with low cost. The strategy can be done by selling 2 ATM Puts, buying 1 ITMPut, and buying 1 OTMPut Options.

Market Scenario : When the investor is neutral on market direction and bearish on volatility.​

Risk : Net premium paid
Reward : Limited (Difference between adjacent strikes - net debit)
BEP : Upper BEP = Strike Price of Highest Strike LongPut - Net Premium Received
Lower BEP = Strike Price of Lowest Strike LongPut + Net Premium Received

Example...

Spot Price 15000

Strategy Strike Price Premium
Buy 1 ITMPutt 15100 224
Sell 2 ATMPut 15000 168 X 2 = 336
Buy 1 OTMCall 14900 121

Upper BEP = 15100 - 9 = 15091 || Lower BEP = 14900 + 9 = 14909

On exit if....

Spot Price ITM Call Payofff ATM Call Payoff OTM Call Payoff Strategy Payoff
14700 176 -264 79 -9
14800 76 -64 -21 -9
14900 -24 -136 -121 -9
14909 -33 154 -121 0
15000 -124 336 -121 91
15091 -215 336 -121 0
15100 -224 336 -121 -9
15200 -224 336 -121 -9
15300 -224 336 -121 -9



Long Call Condor

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

A Long Call Condor is very similar to a long butterfly strategy. The difference is that the two middle sold options have different strikes.

Market Scenario : Low Volatility.
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
buy 1 ITMCall 14800 284
sell 1 ITMCall 14900 221
Sell 1 OTMCall 15100 124
Buy 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 Strategy 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


Long Put Condor​

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

A LongPutCondor is very similar to a longbutterfly strategy. The difference is that the two middle sold options have different strikes.

Market Scenario :Low Volatility
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
Buy 1 ITMPut 15200 284
Sell 1 ITMPut 15100 221
Sell 1 OTMPut 14900 124
Buy 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 Strategy 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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