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Old 23-04-2014, 01:45 PM
shiv shiv is offline
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Default confusing strangle

Dear friends and seniors ,

Please dont mind , here i am with a new confusion on strangle

suppose i am looking at a stock which is standing at 1220 and the difference between strike prices are of rs 20 ( 1200 , 1220 , 1240 , 1260 and so on ) i expecting the prices to go further above or below (1200-1240) in 1-3 days or may be a same day , so i created strangle ,

i buy otm put of 1200 strike at premium of 45 ( or what it may be )
&
i buy otm call of 1240 strike at premium of 47 ( or what it may be )

so at 3rd day the price is 1243 .

my question is when i should profit
1. can i book at this price (1243) and cut the both put and calls

or

2. when the price goes above 1240+(premium47)=1287

and at what factors i have to look for making a perfect strangles

please guide
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Old 23-04-2014, 03:00 PM
no1lives4ever no1lives4ever is offline
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Originally Posted by shiv View Post
Dear friends and seniors ,

Please dont mind , here i am with a new confusion on strangle

suppose i am looking at a stock which is standing at 1220 and the difference between strike prices are of rs 20 ( 1200 , 1220 , 1240 , 1260 and so on ) i expecting the prices to go further above or below (1200-1240) in 1-3 days or may be a same day , so i created strangle ,

i buy otm put of 1200 strike at premium of 45 ( or what it may be )
&
i buy otm call of 1240 strike at premium of 47 ( or what it may be )

so at 3rd day the price is 1243 .

my question is when i should profit
1. can i book at this price (1243) and cut the both put and calls

or

2. when the price goes above 1240+(premium47)=1287

and at what factors i have to look for making a perfect strangles

please guide

Option prices have multiple factors that affects premium. Time and IV along with relationship of strike price to current price are the big factors when you are buying options.

I would strongly suggest reading through a few options books and understanding the various options pricing formulas work. Without a knowledge of how option pricing works, you will not be able to get a proper understanding of these strategies and how they are to be used.

As a basic start, look at answering these queries wrt your original query:
a. How many days are there till expiry.
b. Where do you expect the price of the underlying to end up on expiry?
c. Is there any result due on the stock?
d. Do you have any insider info which will give you a better idea of where prices will be at expiry than the rest of the market?

-- no1lives4ever
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Old 23-04-2014, 03:46 PM
shiv shiv is offline
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Originally Posted by no1lives4ever View Post
Option prices have multiple factors that affects premium. Time and IV along with relationship of strike price to current price are the big factors when you are buying options.

I would strongly suggest reading through a few options books and understanding the various options pricing formulas work. Without a knowledge of how option pricing works, you will not be able to get a proper understanding of these strategies and how they are to be used.

As a basic start, look at answering these queries wrt your original query:
a. How many days are there till expiry.
b. Where do you expect the price of the underlying to end up on expiry?
c. Is there any result due on the stock?
d. Do you have any insider info which will give you a better idea of where prices will be at expiry than the rest of the market?

-- no1lives4ever

bhai

a. i will try to start from monday after expiry
b.suppose if we look to icicibank the daily range of stock is rs 15 to rs 20 and the difference between strike prices are of rs 20 (1200,1220,1240 and so on )
c.i think no
d.i like to work with trend as a trader i look for swing trades but with safest side that,s why iam looking to trade in options and choosing strangles .

bhai and my question is where is my profit on the above mentioned question where is my profit at 1243 or at 1287
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Old 23-04-2014, 03:51 PM
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Originally Posted by shiv View Post

my question is when i should profit
1. can i book at this price (1243) and cut the both put and calls

or

2. when the price goes above 1240+(premium47)=1287

and at what factors i have to look for making a perfect strangles

please guide

1. You can cut both legs or one leg or use a repair strategy or even change the complete strategy, however the question is of PnL.

2. That's the more apt way to book profits.

3. Volatility expansion conditions is what makes perfect strangles.
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Old 23-04-2014, 05:34 PM
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thanks jj bhai ys i will cut both legs ( not mine ) but at what price 1243 or 1287
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Old 23-04-2014, 06:17 PM
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You should enter (buy) a strangle close to expiry only when you expect the price to move sharply in either direction. A significant price movement on either side will help strangle owner.

Remember that on expiry day futures and option prices may not behave rationally due to rollover issues.
For example consider HDFCBANK at today's closing. Cash closed at 737.90, wheres April future closed at 733.35 (0.5% discount).

Also remember that ITM call options (most of the time) trade at discount on expiry day due to STT. There is a rush to square-off ITM call options at expiry to avoid STT on the whole contract amount (strike price x lotsize). This can cause liquidity and slippage issues as well.

I suggest you provide actual strike prices and premiums when asking questions as it will help members provide accurate answers.
Quote:
i buy otm put of 1200 strike at premium of 45 ( or what it may be )
&
i buy otm call of 1240 strike at premium of 47 ( or what it may be )
...
1. can i book at this price (1243) and cut the both put and calls
or
2. when the price goes above 1240+(premium47)=1287

In the above hypothetical example, your profit at expiry would be above Rs 1,332 (1240 + 47+45) or below Rs 1,108 (1200 - 47 - 45) - which is roughly 10% above or below the entry price.
It is unlikely that you would make any profit at Rs 1,243 or even Rs 1,287 unless there was some major news event happening or waiting to happen.
So the above question does not make much sense.

Finally, use a good option analysis tool / calculator to estimate the value of a strangle based on changing prices and volatility.
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Old 23-04-2014, 08:21 PM
shiv shiv is offline
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Originally Posted by MatSol View Post
You should enter (buy) a strangle close to expiry only when you expect the price to move sharply in either direction. A significant price movement on either side will help strangle owner.

Remember that on expiry day futures and option prices may not behave rationally due to rollover issues.
For example consider HDFCBANK at today's closing. Cash closed at 737.90, wheres April future closed at 733.35 (0.5% discount).

Also remember that ITM call options (most of the time) trade at discount on expiry day due to STT. There is a rush to square-off ITM call options at expiry to avoid STT on the whole contract amount (strike price x lotsize). This can cause liquidity and slippage issues as well.

I suggest you provide actual strike prices and premiums when asking questions as it will help members provide accurate answers.

In the above hypothetical example, your profit at expiry would be above Rs 1,332 (1240 + 47+45) or below Rs 1,108 (1200 - 47 - 45) - which is roughly 10% above or below the entry price.
It is unlikely that you would make any profit at Rs 1,243 or even Rs 1,287 unless there was some major news event happening or waiting to happen.
So the above question does not make much sense.

Finally, use a good option analysis tool / calculator to estimate the value of a strangle based on changing prices and volatility.

bhai i didnt mean at expiry i mean at same day or after 1-4 days its given clearly there if price is trading above or below strike price or the strikeprice + premium
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Old 23-04-2014, 08:24 PM
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'' i expecting the prices to go further above or below (1200-1240) in 1-3 days or may be a same day , so i created strangle ''
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Old 24-04-2014, 02:04 AM
no1lives4ever no1lives4ever is offline
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Originally Posted by shiv View Post
bhai and my question is where is my profit on the above mentioned question where is my profit at 1243 or at 1287

This is not such a simple question to answer. It completely depends on how much time is there for the option to expire and what is the iv of the options that you bought.

Option premium depends on the combination of:
a. Strike price of option
b. Price of underlying
c. Time to expiry
d. Risk free Interest rate (this has a minor effect, so can be ignored for many cases)
e. Implied volatility

Since the options are priced using a combination of these factors, you need to look at all of them together. Just looking at price of underlying and the premium + strike price in isolation will not help.

Depending on which parts of these you can predict, you chose a strategy to maximise gains using those variables that you predict. e.g. You can safely predict the time to expiry and the risk free interest rate. You can construct delta neutral strategies that are market neutral.

Some types of questions to consider before you get into a options position:
i. Are you expecting volatility to go down/up?
ii. Are you expecting some news event that will move price sharply in one unknown direction (basically a case of i above)?
iii. Do you expect price to cross beyond the strangle break even price by the time of expiry?
iv. After a while, do you see price moving in only one specific direction?
v. Does the stock have any scheduled event like results, merger, acquisition, regulatory news, etc?

-- no1lives4ever
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Old 24-04-2014, 08:20 AM
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bhai as you explain here all are the things are well clarified , can u tell what is the corelation of breakeven point of strangle , as i supposed to cut the positions at or when the price move or trade upward or downward of the specific strike price . ( my view is to design or hold the strangle is only for 1 to 3-4 days if the price does not go above or below the strike price i will cut my positions , whether it is giving me profit or loss )

please guide
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