Out of the money sell

F&O
1

Hey there guys, I am new to options.

So what I was thinking is that what if I sell out of the money contracts both of PE and CE on expiry day.

For example: If BN is at 28,000, then I will sell CE at 28,800 and PE at 22,200, which is a difference of 800 points.

And my positions will remain hedged because I have shorted both sides.

So if the market remains between 800 points (up or down) and my chosen contracts remain OTM, both will close at Rs1 or 0.something.

And I will be in a good profit.

The only downfall of this strategy is that my chosen strike price should not become ATM or ITM.

Do you guys think it is a good strategy? And is there any fault in this strategy?

2

it is called strangle, you sell OTM PE And CE. You can do it, a lot of people do this including me but you’ve to be aware of risks as it’ll have unlimited risk so do it wisely!

yes OTM contracts will expire worthless that is 0 but as contract can’t be traded at 0INR, you’ll see 0.05 as LTP for those contracts.

3

But sir how will this have unlimited risk? As I have shorted both PE and CE.
If market goes up, PE will protect me and if market goes down CE will protect me and I will be in a very limited loss throughout the day. And it doesn’t matter where market goes, I will be either in a very limited loss or in profit.

Am I missing something?
Can you please tell?
Thanks or replying

5

Let me explain with an example.

Let’s take today’s case. Banknifty was trading at 28400 and at that time I have shorted 29000ce for a premium of 30 rs and 27800pe for a premium of 25rs. Now consider the following 3 situations at expiry.

  1. Banknifty expires at 28400: In this case I vl get total 55rs premium as both ce and pe expire worthless.

  2. Banknifty expires at 29200. In this case my profit from pe will be 25 rs and my loss from ce will be 170 rs (29200-29000-30). Hence my total loss will be 170-25 i.e. 155x25(BN LOT) rs.

3.Banknifty expires at 27500. In this case my profit from ce will be 30 rs and my loss from ce will be 275 rs (27800-27500-25). Hence my total loss will be 275-30 i.e. 245x25(BN LOT) rs.

when u short options,your profit is limited and loss is unlimited. But chance of profit is above 80% depending on strike price.

I have traded today the same strategy by shorting 28700ce and 28000pe.

Hope this helps.

6

You think short strangle is hedged but it actually isn’t because price of an option can only go to 0 but not beyond that and can rise to any extent, that is why they say in short option your profit is limited to premium you receive but losses can be unlimited.

You should learn all about associated risks and all that before you trade.

7

Use sensibull or any free strategy builder to check. A visual pay off chart will be helpful for you to understand better.

Here I created a BNF Short strangle for 19th Expiry with 800 point buffer. BNF Spot at 29750.
Short positions. 30500CE and 28900 PE

You can see the loss keeps on increasing once the break even points are crossed.

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Try different combinations in opstra website.