Inverted long strangle options

Trading
1

Kindly explain inverted long strangle.

Consider I am looking for profits from intrinsic value and not from premiums.

Stock / index trading at Rs. 100

Buying ITM put at 120

Buying ITM call at 80

On expiry day

If expired between 120 and 80, 120PE and 80CE become ITM.

Say expired at 110 where, 120PE is ITM and 80CE is ITM

then profit for buy 120PE (Strike - spot) 120-110 = +10

then profit for buy 80CE (spot-strike) 110-80 = +30

Say expired at 130 where, 120PE is OTM and 80CE is ITM

then loss for buy 120PE (Strike - spot) 120-130 = -10 which is not possible and expired worthless. Lost all premium.

then profit for buy 80CE (spot-strike) 130-80 = +50

Say expired at 70 where, 120PE is ITM and 80CE is OTM

then profit for buy 120PE (Strike - spot) 120-70 = +50

then loss for buy 80CE (spot-strike) 70-80 = -10 which is not possible and expired worthless. Lost all premium

This is how i understood. Kindly correct me if I am wrong

2

You have not taken into account the premium. Even though while entering the trade the options were ITM, they will still carry some form of premium.

Your breakevens will be as follows:

  1. Long Put strike minus net of premium
  2. Long Call strike plus net of premium

Max loss will be the net premium you pay (which should not be substantial). The probability of profits will be quite low.

3

Dear Satish
The way you are thinking reminds me of how I thought some years back. Can’t blame your question and logic. The problem here is for the extrinsic premiums (fat) to be less you have to go deep ITM. The real profit will be achieved only if a big move happens. Even in your example 100 to 130 is 30 percent move. This may not usually happen. So you won’t be able to put huge amount in this kind of strategy.
Due to physical settlement you can try this only in Index

4

thank you all