Neutral Strategies Options

RAVI - IBA

Strategy 1: Long
Straddle
Straddle is neither bullish nor bearish
strategy; it is a market neutral
strategy. Here a trader wishes to take
advantage of the volatility in the
market.
This strategy involves buying of one
Call option and one Put option of the
same strike price, same expiry date
and of the same underlying asset.

Strategy 1: Long
Straddle
Now a trader is bound to make profits once
stock moves in either direction.
If the prices rise significantly, the call
generates income and put expires worthless.
If the prices decrease significantly, the put
generates income and call expires worthless.
Here a trader is looking for high volatility and
expects the market to move with high
magnitude.
Risk: Limited - Reward: Unlimited

Construction - Long
Straddle
Buy 1 Call Option : Buy 1 Put Option
Example:
Nifty is trading at 5250 level; Mr. X expects the
market to move with high magnitude in either of
the directions, he will implement Long Straddle
Strategy.
He will buy one 5200 Call Option for a premium
of Rs. 130 & buy one 5200 Put Option for a
premium of Rs. 65. Lot size of NIFTY is 50. His
net investments will be Rs. 9750. [(130+65)*50]

Long Straddle
Case 1: At expiry if NIFTY closes at
4600 level, then Mr. X will make a profit
of Rs. 20250. [{(600-65)- (130)}*50]
Case 2: At expiry if NIFTY closes at
5100, then Mr. X will make a loss of Rs.
4750. [{(100-65)-(130)}*50]
Case 3: At expiry if NIFTY closes at
5600, then Mr. X will make a profit of
Rs. 10250. [{(400-130)-(65)}*50]

Strategy 2: Short
Straddle
Explanation
This strategy is just the opposite of Long
Straddle. A trader should adopt this strategy
when he expects less volatility in the near future.
Here, a trader will sell one Call Option & one Put
Option of the same strike price, same expiry date
and of the same underlying asset.
If the stock/index hovers around the same levels
then both the options will expire worthless and
the option writer (i.e. trader) will get the
premium.

Strategy 2: Short
Straddle
Explanation
However this is a very risky strategy. If
the price moves up or down sharply
then the losses will be significant for the
option writer (trader).
So this strategy should be implemented
only if you are ready to take calculated
risk i.e. it should be precisely quantified.
Risk: Unlimited / Reward: Limited

Construction Short Straddle

Sell 1 Call Option - Sell 1 Put Option

Example:
Suppose NIFTY is trading around 5200 levels,
Mr. X does not expect the market to move
sharply in the near future and implements a
Short Straddle Strategy. He will sell one 5200
Call Option for a premium of Rs. 100 & sell
one 5200 Put Option for a premium of Rs. 80.
Lot size of NIFTY is 50. His account will get
credited by Rs. 9000. [(100+80)*50]

Construction Short Straddle

Case 1: At expiry if NIFTY closes at

5000, then Mr. X will make a loss of
Rs. 1000. [{(100) + (80 - 200)}*50]
Case 2: At expiry if NIFTY closes at
5250, then Mr. X will make a profit of
Rs. 6500. [{(100-50) + (80)}*50]
Case 3: At expiry if NIFTY closes at
5400, then Mr. X will make a loss of
Rs. 1000. [{(80) (200-100)}*50]

Strategy 3: Long
Strangle
Explanation
A Strangle is similar to Straddle. In Strangle, a
trader will purchase one OTM Call Option and
one OTM Put Option, of the same expiry date
and the same underlying asset.
This strategy will reduce the entry cost for
trader and it is also cheaper than straddle. A
trader will make profits, if the market moves
sharply in either direction and gives extraordinary returns in the near future so that
either of the options will make money.

Strategy 3: Long
Strangle
Explanation
In case of low volatility a trader will
lose his entire investment i.e. the
premium paid for buying the options.
The volatility should be on higher side.
Also, the volatility required for
strangle to make profits should be
more than the volatility required for
straddle to make profits.

Long Strangle
In case of low volatility a trader will lose his
entire investment i.e. the premium paid for
buying the options.
The volatility should be on higher side. Also,
the volatility required for strangle to make
profits should be more
than the volatility required for straddle to
make profits.
Risk: Limited
Reward: Unlimited

Long Strangle

Construction
Buy 1 OTM Call Option
Buy 1 OTM Put Option
Example
If NIFTY is trading around 5200 levels and Mr. X
expects the market to rally significantly on either
side, he applies a Strangle Strategy.
(i) He buys one 5300 OTM Call Option for a
premium of Rs. 55 & (ii) buys one 5100 OTM Put
Option for a premium of Rs. 50.
His net investment will be Rs. 5250. [(55+50)*50]

Long Strangle Example

Case 1: If NIFTY expires at 4800,
then Mr. X will make a profit of Rs.
9750. [{(300-50)-(55)}*50]
Case 2: If NIFTY expires at 5100,
then Mr. X will make a loss of Rs.
5250. [(55+50)*50]
Case 3: If NIFTY expires at 5600,
then Mr. X will make a profit of Rs.
9750. [{(300-55)-(50)}*50]

4. Short Strangle
Explanation:
This strategy is similar to Short Straddle; the only
difference is of the strike prices at which the
positions are built.
Short Strangle involves selling of one OTM Call
Option and selling of one OTM Put Option, of the
same expiry date and same underlying asset.
Here the probability of making profits is more as
there is a spread between the two strike prices,
and if the markets do remain less volatile, then
this strategy will start making profits for traders.

4. Short Strangle
The ideology behind this strategy is that
the market will not be much volatile in the
near future and the expected volatility will
lie between the 2 strike prices.
This strategy is used by expert traders
who quantify the implied volatility
accurately.
Risk: Unlimited
Reward: Limited

Construction : Short
Strangle
Sell 1 OTM Call Option
Sell 1 OTM Put Option

Example Short Strangle

Suppose NIFTY is trading around 5200 odd

points, Mr. X does not expect the market to
move much in the near future.
As he is neutral about the volatility of NIFTY he
will enter in a Short Strangle Strategy.
(i) He will sell one 5300 OTM Call Option for a
premium of Rs. 55 & (ii) sell one 5100 OTM Put
Option for a premium of Rs. 50.
The lot size of NIFTY is 50.
Hence, his account will get credited by Rs. 5000.
[(50+50)*50]

EXAMPLE Short Strangle

Contd.
Case 1: At expiry if NIFTY closes at 5000,
then Mr. X will neither make profit nor loss. His
net cash flow will be 0. [{(50)-(100-50)}*50]
Case 2: At expiry if NIFTY closes at 5250,
then Mr. X will make a profit of Rs. 5000.
[(50+50)*50]
Case 3: At expiry if NIFTY closes at 5400,
then Mr. X will neither make profits nor losses.
His net cash flow will be 0. [{(100-50)(50)}*50]

Strategy 5: Long Call

Butterfly
Explanation:
A trader, who is neutral in nature and
believes that there will be very low
volatility i.e. expects the market to remain
range bound, will implement this strategy.
This strategy involves selling of 2 ATM Call
Options, buying 1 ITM Call Option & buying
1 OTM Call Option of the same expiry date
& same underlying asset. The difference
between the strikes should be equal.

Strategy 5: Long Call

Butterfly
If the market remains range bound then
this strategy will start making profits.
If the market moves out of strike range
in either way, then it will start making
loss.
The loss generated will also be capped.
Risk: Limited
Reward: Limited

Construction Long Call

Butterfly
Sell 2 ATM Call Options
Buy 1 ITM Call Option
But 1 OTM Call Option

Example Long Call Butterfly

Suppose that NIFTY is trading at 5200 levels,

Mr. X thinks that there is low volatility in the
market and expects it to stay between a
certain range, then he will implement the Long
Call Butterfly Strategy. He will sell 2 NIFTY
5200 ATM Call Options for a premium of Rs.
200 (100*2), buy 1 NIFTY 5100 ITM Call Option
at a premium of
Rs. 165 & buy 1 NIFTY 5300 OTM Call Option at
a premium of Rs. 55. The net investment will
only be Rs.1000. [{(100*2)-(165)-(55)}*50]

Example Long Call Butterfly

Suppose that NIFTY is trading at 5200, Mr. X

implements the Long Call Butterfly Strategy.
A) He Sells 2 NIFTY 5200 ATM Call Options for a
premium of Rs. 200 (100*2),
B) Buys 1 NIFTY 5100 ITM Call Option for a
premium of Rs. 165 &
C) Buys 1 NIFTY 5300 OTM Call Option for a
premium of Rs. 55.
He will get a credit of Rs. 1000 [(100*2)} {(165) + (55) 50] since he bought 2 Call
Options.

Example Long Call Butterfly

Case 1: At expiry if the NIFTY closes at

4900, then Mr. X will make a profit of Rs.
1000. [{165+55 (100*2)}*50]
Case 2: At expiry if the NIFTY closes at
5200, then Mr. X will make a loss of Rs.
10500. [{(100-165) + 55 - (100*2)}*50]
Case 3: At expiry if the NIFTY closes at
5500, then Mr. X will make a profit of Rs.
1000. [{(400-165) + ((300- 100)*2) (20055)}*50]

Strategy 6: Short Call

Butterfly
Explanation
This strategy is opposite of the Long Call Butterfly
Strategy, a trader expects the market to remain
range bound in Long Call Butterfly, but here he
expects the market to move beyond strike
boundaries in Short Call
Butterfly. If the trader is bullish on the markets
volatility, he will implement this strategy. Here also
there should be equal distance between the strikes.
Profits from this strategy are capped.
Risk: Limited
Reward: Limited

Construction Short Call Butterfly

Buy 2 ATM Call Options

Sell 1 ITM Call Option
Sell 1 OTM Call Option

Example - Short Call

Butterfly
Suppose that NIFTY is trading at 5200, Mr. X
implements the Short Call Butterfly Strategy.
A) He buys 2 NIFTY 5200 ATM Call Options for
a premium of Rs. 200 (100*2),
B) sells 1 NIFTY 5100 ITM Call Option for a
premium of Rs. 165 &
C) sells 1 NIFTY 5300 OTM Call Option for a
premium of Rs. 55.
He will get a credit of Rs. 1000 [{(165) + (55)
(100*2)}*50] since he sold 2 Call Options.

 Case 1: At expiry if the NIFTY closes at

4900, then Mr. X will make a profit of Rs.
1000. [{165+55 (100*2)}*50]
Case 2: At expiry if the NIFTY closes at
5200, then Mr. X will make a loss of Rs.
10500. [{(100-165) + 55 - (100*2)}*50]
Case 3: At expiry if the NIFTY closes at
5500, then Mr. X will make a profit of Rs.
1000. [{(400-165) + ((300- 100)*2) (20055)}*50]

Strategy 7: Long Put

Butterfly
Explanation
The Long Put Butterfly is a neutral strategy where
a trader will be bearish on the volatility i.e. he
thinks the market will have sideways kind of
movement and will not rally sharply in either
direction in the near future.
This strategy involves sale of 2 ATM Put Options,
buy 1 ITM and 1 OTM Put Option.
The risk and reward are limited.
Risk: Limited
Reward: Limited

Example Long Put Butterfly

Suppose NIFTY is trading at 5200 levels. Mr. X is
bearish on volatility and expects the market to move
sideways.
He will implement Long Put Butterfly Strategy. He will
A) sell two 5200 ATM Put Options for a premium of Rs.
85,
B) buys one 5100 NIFTY OTM Put Option at a premium
of Rs. 50 &
C) goes long on one 5300 NIFTY ITM Put Option at a
premium of Rs. 135.
His net investment will be Rs. 750. [(85*2)-50135)*50]

Example Long Put Butterfly

Case 1: At expiry if NIFTY closes at 5000,
then Mr. X will make a loss of Rs. 750.
[{(100-50) ((200-85)*2) + (300-135)}*50]
Case 2: At expiry if NIFTY closes at 5200,
then Mr. X will make a profit of Rs. 4250.
[{(85*2) - (50) + (100- 135)}*50]
Case 3: At expiry if NIFTY closes at 5400,
then Mr. X will make a loss of Rs. 750
(Investment value). [{(85*2)- (50)(135)}*50]

Strategy 8: Short Put

Butterfly
Explanation
In Short Put Butterfly strategy, a trader is
neutral in nature and expects the market
to remain range bound in the near future.
A trader will buy 2 ATM Put Options; sell 1
ITM & 1 OTM Put Options. Here risk and
returns both are limited.
Risk: Limited
Reward: Limited

Construction

Buy 2 ATM Put Options

Sell 1 ITM Put Option
Sell 1 OTM Put Option

Example

Suppose NIFTY is trading at 5200 odd

points. Mr. X is bearish on volatility and
expects the market to move upwards
gradually at a very slow pace.
He will implement Short Put Butterfly
Strategy. He will buy two 5200 ATM Put
Options at a premium of Rs. 85, sell one
5100 NIFTY OTM Put Option for a premium
of Rs. 50 & shorts one 5300 NIFTY ITM Put
Option for a premium of Rs. 135.

 Case 1: At expiry if NIFTY closes at 5000

level, then Mr. X will make a profit of Rs.
750. [{((200-85)*2) - (100- 50) - (300135)}*50]
Case 2: At expiry if NIFTY closes at 5200
level, then Mr. X will make a loss of Rs.
4250. [{(50)-(85*2)-(100- 135)}*50]
Case 3: At expiry if NIFTY closes at 5400
level, then Mr. X will make a profit of Rs.
750. [(50) - (85*2) + (135)*50]

Strap Neutral Strategy

Explanation
Strap Strategy is similar to Long Straddle, the only
difference is the quantity traded.
A trader will buy two Call Options and one Put Options.
In this strategy, a trader is very bullish on the market
and volatility on upside but wants to hedge himself in
case the stock doesnt perform as per his expectations.
This strategy will make more profits compared to long
straddle since he has bought 2 calls.
Risk: Limited
Reward: Unlimited

Example - Strap
Mr. X is bullish on NIFTY and enters in
a Strap Strategy.
He buys two 5200 NIFTY ATM Call
Options at a premium of Rs. 100 and
simultaneously buys one 5200 ATM
Put Option at a premium of Rs. 85.
His net investment will be Rs. 14250
[{(100*2) + (85)}*50] 3 options
premiums

 Case 1: At expiry if NIFTY closes at 4900,

then Mr. X will make a profit of Rs. 750.
[{(300-85) + (0-200)}*50]
Case 2: At expiry if NIFTY closes at 5200,
then Mr. X will make a loss of Rs. 14250
(Entire investment
amount). [{(0-200) + (0-85)}*50]
Case 3: At expiry if NIFTY closes at 5400,
then Mr. X will make a profit of Rs. 5750.
[{((200-100)*2)-(85)}*50]

Strategy - Strip
Explanation
Strip Strategy is the opposite of Strap Strategy.
When a trader is bearish on the market and bullish
on volatility then he will implement this strategy by
buying two ATM Put Options & one ATM Call Option,
of the same strike price, expiry date & underlying
asset.
If the prices move downwards then this strategy will
make more profits compared to short straddle
because of the (double) quantity involved.
Risk: Limited
Reward: Unlimited

Example Strap

Mr. X is bearish on NIFTY and enters

in a Strip Strategy, buys 2 5200
NIFTY ATM Put Options at a premium
of Rs. 85, buys 1 5200 ATM Call
Option at a premium of Rs. 100. His
net investment will be Rs. 13500
[{(85*2) + (100)}*50]

Example Strap - contd.

Case 1: At expiry if NIFTY closes at 4900, then
Mr. X will make a profit of Rs. 16500. [{((30085)*2) (100)}*50]
Case 2: At expiry if NIFTY closes at 5200, then
Mr. X will make a loss of Rs. 13500 (entire
investment value). [{((0-85)*2) + (0-100)}*50]
Case 3: At expiry if NIFTY closes at 5400, then
Mr. X will make a loss of Rs. 3500. [{(200100)- 85*2)}*50]