A Short Strangle is a slight modification to the Short Straddle. This strategy involves the simultaneous selling of a slightly out-of-the-money (OTM) put and a slightly out-of-the-money (OTM) call of the same underlying stock and expiration date. A much greater movement is required in the underlying stock / index, for the Call and Put option to be worth exercising. This gives a room for the option seller and increases the probability of trade going in his favour. If the underlying stock does not show much of a movement, the seller of the Strangle gets to keep the Premium.
Nifty is trading at 10300 on Nov 10 2017. There is a strong resistance for nifty at 10470 and a strong support at 10000. To take advantage of this situation, I would sell 10500CE and 10000PE and receive a premium of 46 and 26. Let’s look at the payoff diagram and examine different situations as to what would happen when nifty expires at different strike prices
|Nifty at expiry||Put Payoff 10000PE||Call Payoff 10500CE||Net Payoff|
As seen in the above payoff, trader is in in profit until nifty remains in between 10000 and 10500. The moment nifty expires below 10000 or above 10500 the trader is in loss. Loss is unlimited in this case and profit is limited to the premium received.