I have one question, sooner you answer better it is, i want to know about long strangles,
suppose, one has to do long nifty strangles which are OTM, and put price is 20 and call price 4, so still one should go buy equal no. of lots ? or divide amount in 2 and allocate for puts & calls equally? or use counter-proportionality…like 1/5th amt for put - 20 rs and remaining 4/5th amt. for 4rs call?
My time horizon - till expiry
and risk – its fine both of them expire worthless
Thanks for being so Quick abbanerjee! Its my 1st question ever asked…still little confused…yeah strategy is delta neutral…so…should one divide his capital in two parts …and half of it goes to buy put 18rs & other half for calls 4 rs?
Yes, in that case, if delta for 9800PE trading at 18 is 0.04 and if delta for 11200CE trading at 4 is 0.01, then for a delta neutral strategy, you must buy 13 lots of 9800PE and 52 lots of 11200CE.
975 * 0.04 = 3900 * 0.01
Also note that if Nifty falls between 9800 and 11200, then you lose your entire premium on both the options. If you are certain Nifty will have a big move in one particular direction, then you can trade a smaller qty of strikes that are closer to the price of Nifty.
Pls note that what you people are talking about is delta neutral strategy, its not strangle, pls note effect of vega along with delta …pls refer to varsity topic on strangle by Nitin sir. for more precise understanding…
@goldb, yes, precisely, i read that article too, copying below for quick reference,
So, what is ur take on it?
Nifty is trading at 7921, to set up a strangle we need to buy OTM Call and Put options. Do note, both the options should belong to the same expiry and same underlying. Also the execution should happen in the same ratio (missed this point while discussing straddle).
Same ratio here means – one should buy the same number of call option as that of put option. For instance it can be 1:1 ratio meaning 1 lot of call, 1 lot of put option. Or it can be 5:5, meaning buy 5 lots of call and 5 lots of put option. Something like 2:3 is not considered strangle (or straddle) as in this case you would be buying 2 lots of call options and 3 lots of put options.