InvestorQ : What is meant by creating Nifty strangles and is it a good strategy in the market?
Sam Eswaran made post

What is meant by creating Nifty strangles and is it a good strategy in the market?

Answer
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swati Bakhda answered.
1 year ago


That would largely depend on the nature of the market. Nifty strangles is useful when the market is volatile. What do we understand by a strangle strategy on the Nifty? A strangle strategy entails the buying of a higher strike call option and a lower strike put option on the same stock or index. For example with the Nifty at around 10,600 levels, you can create a Strangle by buying a 10700 Nifty call and simultaneously buying a 10500 Nifty put option. This strategy works very well when the markets are volatile. This is how a Strangle on the Nifty works:

Particulars

Buy 10500 Nifty Put

Buy 10700 Nifty Call

Pay off on Strategy

Premium

17.25

17.50

Rs.34.75 (Total Cost)

Breakeven

Lesser than

10,465.25

Higher than 10,734.75

In the above case, the total cost of the Strangle for the month of May is Rs.34.75. That is because there is just 1 week left for expiry. If you go for June expiry then your cost will be much higher. You are profitable on this strategy either if Nifty goes above 10734.75 or below 10,465.25. Better still, if you see a rise in volatility in the markets then you will be profitable as the premiums of calls and puts will go up automatically. You need to repeat this exercise month after month but the Strangle only works in volatile times.