Follow-up - Nifty Trading Strategy - Short Strangle

Thought I'd do a quick follow-up on the Nifty Trading Strategy given a few days back in my post. But before that, I got quite a few queries asking me to explain the strategy a little better, mostly by those who only part understood it and were fairly keen on executing it.

So here's a quick primer on a "Short Strangle Strategy":

Its made by shorting a put option and a call option. The put option must be of a lower strike than the call option. The idea here is, if the underlying (here, Nifty) is likely to stay within a particular range before the next option expiry, you can make money by betting on it. If it does so, good...you get to keep all the premium received by selling a call and a put. If it does not, well, the losses, theoretically, are unlimited. Let's understand this a little better; here's the profit profile of a short call and a short put option.

(click for a sharper image)

So, like it was suggested in the strategy, shorting 1 Nifty (6100 strike) call option on that day would have paid you 

Rs. 15.4 *50 (each lot of nifty has 50 units) = Rs. 770.

Thus, you'll retain this entire amount if Nifty stays below 6100, and you'd break-even at 6115.4 and for every point above 6115.4, you'd stand to lose 1*50 = Rs. 50

And shorting 1 Nifty (5700 strike) put option would have yielded 

Rs. 87 *50 = Rs. 4350.

Thus, you'll retain this entire amount if Nifty stays above 5700, and you'd break-even at 5613 and for every point below 5613, you'd stand to lose 1*50 = Rs. 50

So the total money received by you at the start of strategy would have been 

770+4350 = Rs. 5120.

You'll retain this entire amount if Nifty stays between 5700 and 6100, and you'd break-even at 5613 and 6115.4 for every point below 5613 or above 6115.4, you'd stand to lose 1*50 = Rs. 50

So this is how the profit profile of the suggested short strangle would look like:

(click for a sharper image)

And here's how the strategy has performed from the time it was given:

(click for a sharper image)

As of now, the strategy is making money to the tune of over Rs. 2800 / lot. There are 3 more trading days left - since 26th is a trading holiday. The options will start losing their time value fairly quickly now which will make this strategy more profitable. Any sharp downside movement (we're quite far away from hitting the upper limit of 6100) although, will result in losses. 

Happy Trading !