Module 6 Option Strategies

Chapter 10

The Long Straddle

147

10.1 – The directional dilemma

How many times have you been in a situation wherein you take a trade after much conviction, either long or short and right after you initiate the trade the market moves just the other way round? All your strategy, planning, efforts, and capital go for a toss. I’m certain this is one situation all of us have been in. In fact this is one of the reasons why most professional traders go beyond the regular directional bets and set up strategies which are insulated against the unpredictable market direction. Strategies whose profitability does not really depend on the market direction are called “Market Neutral” or “Delta Neutral” strategies. Over the next few chapters we will understand some of the market neutral strategies and how a regular retail trader can execute such strategies. Let us begin with a ‘Long Straddle’. M6-C10-Cartoon

10.2 – Long Straddle

Long straddle is perhaps the simplest market neutral strategy to implement. Once implemented, the P&L is not affected by the direction in which the market moves. The market can move in any direction, but it has to move. As long as the market moves (irrespective of its direction), a positive P&L is generated. To implement a long straddle all one has to do is –

  1. Buy a Call option
  2. Buy a Put option

Ensure –

  1. Both the options belong to the same underlying
  2. Both the options belong to the same expiry
  3. Belong to the same strike

Here is an example which explains the execution of a long straddle and the eventual strategy payoff. As I write this, the market is trading at 7579, which would make the strike 7600 ‘At the money’. Long straddle would require us to simultaneously purchase the ATM call and put options. Image 1_Setup As you can see from the snapshot above, 7600CE is trading at 77 and 7600 PE is trading at 88. The simultaneous purchase of both these options would result in a net debit of Rs.165. The idea here is – the trader is long on both the call and put options belonging to the ATM strike. Hence the trader is not really worried about which direction the market would move. If the market goes up, the trader would expect to see gains in Call options far higher than the loss made (read premium paid) on the put option. Similarly, if the market goes down, the gains in the Put option far exceeds the loss on the call option. Hence irrespective of the direction, the gain in one option is good enough to offset the loss in the other and still yield a positive P&L.  Hence the market direction here is meaningless. Let us break this down further and evaluate different expiry scenarios. Scenario 1 – Market expires at 7200, put option makes money This is a scenario where the gain in the put option not only offsets the loss made in the call option but also yields a positive P&L over and above. At 7200 –

  • 7600 CE will expire worthless, hence we lose the premium paid i.e Rs. 77
  • 7600 PE will have an intrinsic value of 400. After adjusting for the premium paid i.e Rs.88, we get to retain 400 – 88 = 312
  • The net payoff would be 312 – 77 = + 235

As you can see, the gain in put option after adjusting for the premium paid for put option and after adjusting for the premium paid for the call option still yields a positive P&L. Scenario 2 – Market expires at 7435 (lower breakeven) This is a situation where the strategy neither makes money nor loses any money.

  • 7600 CE would expire worthless; hence the premium paid has to be written off. Loss would be Rs.77
  • 7600 PE would have an intrinsic value of 165, hence this is the gain in the put option
  • However the net premium paid for the call and put option is Rs.165, which gets adjusted with the gain in the put option

If you think about it, with respect to the ATM strike, market has indeed expired at a lesser value. So therefore the put option makes money. However, the gains made in the put option adjusts itself against the premium paid for both the call and put option, eventually leaving no money on the table. Scenario 3 – Market expires at 7600 (at the ATM strike) At 7600, the situation is quite straight forward as both the call and put option would expire worthless and hence the premium paid would be gone. The loss here would be equivalent to the net premium paid i.e Rs.165. Scenario 4 – Market expires at 7765 (upper breakeven) This is similar to the 2nd scenario we discussed. This is a point at which the strategy breaks even at a point higher than the ATM strike.

  • 7600 CE would have an intrinsic value of 165, hence this is the gain in Call option
  • 7600 PE would expire worthless, hence the premium paid towards the option is lost
  • The gain made in the 7600 CE is offset against the combined premium paid

Hence the strategy would breakeven at this point. Scenario 5 – Market expires at 8000, call option makes money Clearly the market in this scenario is way above the 7600 ATM mark. The call option premiums would swell, so much so that the gains in call option will more than offset the premiums paid. Let us check the numbers –

  • 7600 PE will expire worthless, hence the premium paid i.e Rs.88 is to be written off
  • At 8000, the 7600 CE will have an intrinsic value of 400
  • The net payoff here is 400 – 88 – 77 = +235

So as you can see, the gain in call option is significant enough to offset the combined premiums paid. Here is the payoff table at different market expiry levels. Image 2_payofftable As you can observe –

  1. The maximum loss (165) occurs at 7600, which is the ATM strike
  2. The profits are unlimited in either direction of the market

We can visualize these points in the payoff structure here – Image 3_Payoff From the V shaped payoff graph, the following things are quite clear –

  1. With reference to the ATM strike, the strategy makes money in either direction
  2. Maximum loss is experienced when markets don’t move and stay at ATM
    1. Max loss = Net premium paid
  3. There are two breakevens – on either side, equidistant from ATM
    1. Upper Breakeven = ATM + Net premium
    2. Lower Breakeven = ATM – Net premium

I’m certain, you find this strategy quite straight forward to understand and implement. In summary, you buy calls and puts, each leg has a limited down side, hence the combined position also has a limited downside and an unlimited profit potential. So in essence, a long straddle is like placing a bet on the price action each-way  – you make money if the market goes up or down. Hence the direction does not matter here. But let me ask you this – if the direction does not matter, what else matters for this strategy?

10.3 – Volatility Matters

Yes, volatility matters quite a bit when you implement the straddle. I would not be exaggerating if I said that volatility makes or breaks the straddle. Hence a fair assessment on volatility serves as the backbone for the straddle’s success. Have a look at this graph below – Image 4_volatility The y-axis represents the cost of the strategy, which is simply the combined premium of both the options and the x-axis represents volatility. The blue, green, and red line represents how the premium increases when the volatility increases given that there is 30, 15, and 5 days to expiry respectively. As you can see, this is a linear graph and irrespective of time to expiry, the strategy cost increases as and when the volatility increases. Likewise the strategy costs decreases when the volatility decreases. Have a look at the blue line; it suggests when volatility is 15%, the cost of setting up a long straddle is 160. Remember the cost of a long straddle represents the combined premium required to buy both call and put options. So at 15% volatility it costs Rs.160 to set up the long straddle, however keeping all else equal, when volatility increases to 30% it costs Rs.340 to set up the same long straddle. In other words, you are likely to double your money in the straddle provided –

  1. You set up the long straddle at the start of the month
  2. The volatility at the time of setting up the long straddle is relatively low
  3. After you set up the long straddle, the volatility doubles

You can make similar observations with the green and red line which represents the ‘price to volatility’ behavior when the time to expiry is 15 and 5 days respectively. Now, this also means you will lose money if you execute the straddle when the volatility is high which starts to decline after you execute the long straddle. This is an extremely crucial point to remember. At this point, let us have a quick discussion on the overall strategy’s delta. Since we are long on ATM strike, the delta of both the options is close to 0.5.

  • The call option has a delta of + 0.5
  • The put option has a delta of – 0.5

The delta of call option offsets the delta of put option thereby resulting in a net ‘0’ overall delta. Recall, delta shows the direction bias of the position. A +ve delta indicates a bullish bias and a -ve delta indicates a bearish bias. Given this, a 0 delta indicates that there is no bias whatsoever to the direction of the market. So all strategies which have zero deltas are called ‘Delta Neutral’ and Delta Neutral strategies are insulated against the market direction.

10.4 – What can go wrong with the straddle?

On the face of it a long straddle looks great. Think about it – you get to make money whichever way the market decides to move. All you need is the right volatility estimate. Therefore, what can really go wrong with a straddle? Well, two things come in between you and the profitability of a long straddle –

  1. Theta Decay – All else equal, options are depreciating assets and this particularly hurts long positions. The closer you get to expiration, the lesser time value of the option. Time decay accelerates exponentially during the last week before expiration, so you do not want to hold onto out-of-the-money or at-the-money options into the last week and lose premiums rapidly.
  2. Large breakevens – Recollect, in the example we discussed earlier, the breakeven points were 165 points away from the ATM strike. The lower breakeven point was 7435 and the upper breakeven was 7765, considering the ATM strike was 7600. In percentage terms, the market has to move 2.2% (either ways) to achieve breakeven. This means that from the time you initiate the straddle, the market or the stock has to move atleast 2.2% either ways for you to start making money…and this move has to happen within a maximum of 30 days. Further if you want to make a profit of atleast 1% on this trade, then we are talking about a 1% move over and above 2.2% on the index. Such large move on the index is quite a challenge in my opinion and I will explain why in the next chapter.

Keeping the above two points plus the impact on volatility in perspective, we can summarize what really needs to work in your favor for the straddle to be profitable –

  1. The volatility should be relatively low at the time of strategy execution
  2. The volatility should increase during the holding period of the strategy
  3. The market should make a large move – the direction of the move does not matter
  4. The expected large move is time bound, should happen quickly – well within the expiry

From my experience trading long straddles, they are profitable when setup around major market events and the impact of such events should exceed over and above what the market expects. Let me explain the ‘event and expectation’ part a bit more, please do read the following carefully. Let us take the Infosys results as an example here. Event – Quarterly results of Infosys Expectation – ‘Muted to flat’ revenue guideline for the coming few quarters. Actual Outcome – As expected Infosys announces ‘muted to flat’ revenue guideline for the coming few quarters. If you were the set up a long straddle in the backdrop of such an event (and its expectation), and eventually the expectation is matched, then chances are that the straddle would fall apart. This is because around major events, volatility tends to increase which tends to drive the premium high. So if you are to buy ATM call and put options just around the corner of an event, then you are essentially buying options when the volatility is high. When events are announced and the outcome is known, the volatility drops like a ball, and therefore the premiums. This naturally breaks the straddle down and the trader would lose money owing to the ‘bought at high volatility and sold at low volatility’ phenomena. I’ve noticed this happening over and over again, and unfortunately have seen many traders lose money exactly for this reason. Favorable Outcome – However imagine, instead of ‘muted to flat’ guideline they announce an ‘aggressive’ guideline. This would essentially take the market by surprise and drive premiums much higher, resulting in a profitable straddle trade. This means there is another angle to straddles – your assessment of the event’s outcome should be couple of notches better than the general market’s assessment. You cannot setup a straddle with a mediocre assessment of events and its outcome. This may seem like a difficult proposition but you will have to trust me here – few quality years of trading experience will actually get you to assess situations way better than the rest of the market. So, just for clarity, I’d like to repost all the angles which need to be aligned for the straddle to be profitable –

  1. The volatility should be relatively low at the time of strategy execution
  2. The volatility should increase during the holding period of the strategy
  3. The market should make a large move – the direction of the move does not matter
  4. The expected large move is time bound, should happen quickly – well within the expiry
  5. Long straddles are to be set around major events, and the outcome of these events to be drastically different from the general market expectation.

You may be wondering there are far too many points that come in between you and the long straddle’s profitability. But worry not, I’ll share an antidote in the next chapter  – The Short Straddle, and why it makes sense.


Key takeaways from this chapter

  1. Strategies which are insulated to market direction are called ‘Market Neutral’ or ‘Delta neutral’
  2. Market neutral strategies such as long straddle makes money either which way the market moves
  3. Long straddle requires you to simultaneously buy the ATM Call and Put option. The options should belong to the same underlying, same strike, and same expiry
  4. By buying the CE and PE – the trader is placing the bet on either direction
  5. The maximum loss is equal to the net premium paid, and it occurs at the strike at which the long straddle has been initiated
  6. The upper breakeven is ‘strike + net premium’. The lower breakeven is ‘strike – net premium’
  7. The deltas in a long straddle adds up to zero
  8. The volatility should be relatively low at the time of strategy execution
  9. The volatility should increase during the holding period of the strategy
  10. The market should make a large move – the direction of the move does not matter
  11. The expected large move is time bound, should happen quickly – well within the expiry
  12. Long straddles are to be set around major events, and the outcome of these events to be drastically different from the general market expectation.

Download Bull Call Spread Excel Sheet

147 comments

  1. keshav says:

    Thanks for the wonderful chapter.. Where to find the financial events sir.?

  2. Ravinder singh sandhu says:

    Thanks sir ji, you are a super man

  3. sastry says:

    Dear Sir,long and
    Please indicate the probable range of VIX- LOW VOLATALITY AND HIGH VOLATALITY in general out of your very good experience for both INDEX and OPTIONS strategies either for long or short because I am a new beginner for my guidance. Thanks and Best Regards, R V N Sastry

    • Karthik Rangappa says:

      Sastry – I’d consider ViX values around 15% as low and about 25-28% as high. However for stock it can vary…something like 40% for Infy is high and 20% can be low.

  4. suresh.ks says:

    HI,sir
    How many days will it take to complete this OPtion Strategy module and how many lessons are left?

  5. Ravi says:

    Sir when u start module – Trading Psychology and Money Management.. Which consists 90% of trading ( 60% for trading Psychology + 30% for money management)…
    U r covering only 10% of trading….
    Please Start Trading Psychology module as soon as possible..
    Its my opinion that without knowing Trading psychology and money management… No one can become successful trader ..
    Ur writing skill is superb.. I have been waiting for Trading Psychology module for 5 months…still I think I have to wait 4-5 months. 😞

  6. Yes this works out perfectly when the direction of the market trend is one sided, either well up or well down.

  7. Jatin says:

    Sir, I am eagerly waiting for PDF modules. When can we get it?? As they are more suitable for printing and reading

  8. Sushreet Pattanayak says:

    Isn’t a long put straddle better than a long straddle in all scenarios? Wherein we’d be taking a long position and a put option with a strike price of the entry price for the same underlying script. You’d be saving on the call option premium so your margins would be better. Rest would work the same way. Would there be a scenario when a long straddle is better than a long put straddle?

    • Karthik Rangappa says:

      Not sure if there is anything like a ‘long put straddle’. The strategy that you are talking about – isit like buying Futures plus buying put? If yes, this would be an expensive strategy as it requires margin deposits for the futures.

      • R P HANS says:

        Sir, Long future and long put will it not be equal to long call synthetic? Its pay out will be entirely different from the long straddle.
        pl. correct if i have misunderstood the question of Shri Sushreet Pattanayak

        Just a minor thing. This module has started and its 10 chapters are over so it is better to remove the word “Coming Soon” from the module graphics.

        • Sushreet Pattanayak says:

          Hi R. Wouldn’t the payouts be similar? Your profit would be future price-strike price-premium if the script appreciates or strike price-future price-premium if the script depreciates. Am I right Karthick? If so notwithstanding margin money isn’t this a more efficient trade with respect to payouts (no CE premium)? Sorry if my understanding is off point, very new to F&O.

          • Karthik Rangappa says:

            Sushreet – I guess the best way to understand the payoff would be to actually plot it and visualize it on excel. Whenever we have more than 2 option legs, the payoff are tricky and you need to visualize it to understand how they work.

        • Karthik Rangappa says:

          Long Call and short put would make a synthetic call and its payout will be similar to that of a long futures, and yes, it is completely different from a long straddle.

          Thanks for point the graphics bit :)… we are just few more chapters away from closing this module, guess we will replaced it the module graphics at a later stage.

  9. Sushreet Pattanayak says:

    Oh also a big shout-out to you guys for Zerodha Varsity. Very lucid writing!

  10. Nivedita Natekar says:

    Request you to kindly send somebody to explain the whole procedure of buying and selling on the website

  11. Preetam says:

    Sir:
    An observation which I would like to share.
    Call Delta: 50
    Put Delta: 50
    Nifty increase from 7760 to 7791.
    VIX decreases from 17.84 to 17.42

    But increase in call option is only 9 points, whereas put option decreased by 20 points. Why is the increase in call option less than put option?

    Regards,
    Preetam

    • Karthik Rangappa says:

      Couple of reasons –

      1) When Volatility drops, premiums drop. In this case volatility dropped and market increased , both are favorable for the drop in Put premiums
      2) Call option has gone up because the markets increased, but then volatility has dropped which limits the increase in premiums.

  12. shravan says:

    how to calculate delta value and how to know that volatility is 15 % sir?

  13. SARAVANA PERUMAL D says:

    Hi Karthik,

    When will i expect the commodity module. I’m wait for that.

  14. Beena Chauhan says:

    Sir please suggest me some website name which gives me the knowledge about base metals

  15. Khyati Verdhan says:

    Hi kartik
    Please teach me some rules/ways of BTST/STBT trade

    • Karthik Rangappa says:

      The only two things to keep in mind while doing BTST – look for high volume breakouts and trade only liquid stocks!

  16. Deepak gagrani says:

    Sir can you share u comment when we can take positions on CE and PE at same time. Means just after the expiry or wait 4-5 days after the expiry and how to calculate premium.

    • Karthik Rangappa says:

      To calculate the premium you can use the B&S calculator here – https://zerodha.com/tools/black-scholes

      You can initiate the straddle anytime you wish – just make sure the volatility is low and you expect it to increase over your holding period.

      • Deepak gagrani says:

        But how much minimum volatility %. Link which u have shared.
        Not working

        • Karthik Rangappa says:

          The least volatility I’ve seen in Nifty is around 13%, hopefully this should give you a perspective.

          • Deepak gagrani says:

            Sir on 13-04 icici bank trading on 244 on days high and same time 240 PE was trading on implied volatility 27.75 and CE at 27.31. So can we buy or sell put or call. And the same time 220 PE was trading in implied volatility 34.29.so in both the scenario can we buy put and hope market will come down

          • Karthik Rangappa says:

            Well, this depends on many factors including Volatility. You will have to check how the volatility of 27.75 fares with respect to ICICI’s historical volatility. If its low and expected to increase, then yes volatility is a favorable factor for establishing a Long position.

  17. Sooraj Jogendra Mishra says:

    Karthik Sir,
    As you said long straddle is useful when event are coming like announcement of quarterly results….We come to know results dates on site like moneycontol etc but do you know any site that also tells about timing of such announcements…?? because some companies results are announced after market hours while some announced during market hours… that make me confused whiling making positions…

  18. Shanky Agrawal day. says:

    Hello Sir

    How can we exercise the option purchased. On the last expiration day can we exercise on any price prevailing on that day.

    • Karthik Rangappa says:

      Yes, you can exercise the option only on the day of the expiry at prevailing market rates.

      • SUBHANKAR SAHA says:

        BUT HOW TO EXERCISE IN SOFTWARE? THERE ARE STILL BUY AND SELL AVAILABLE IN THE OPTION SCRIP AT EXPIRY DAY(IF I HOLD IT PREVIOUSLY). SO I AM CONFUSED ABOUT WHAT TO DO IN KITE OR PI TO EXERCISE IT….

  19. Rajesh says:

    This year, I have some profit from Intra Day trading and for which I have to fill up ITR 4 for speculative income. Pls tell me what details should I provide to CA to enable him to fill up the speculative income part of the ITR 4. I plan to take the help of AERI.

  20. rohan says:

    By volatility you mean IV?
    nifty spot is at 7884, 7900CE IV is 15.7 and 7900PE IV is 15.13, is it advisable to place long straddle before 19 may election results?

    • Karthik Rangappa says:

      Yes, provided you also expect the volatility to go up in the timeframe you expect to hold the trade.

  21. Naresh says:

    Hi Karthik, Is there a workable and accessible software in which one can create a marketwatch of spreads, strangles etc and track the daily variations and its chart of premiums paid/received ? Both for current series and historic records etc. Something like show me the strangle price from 1st June to 17th June for 8100 June series. Maybe past records as well for comparison. Does options oracle do the same job ? IS it a working software ? Is it a licensed product ? Thanks

  22. CHAIT says:

    Can we check IV in real time in the charts?
    “Historical Volatility” in the studies column of KITE is not at all close to IV in the options chart of NSE. how is HV related to IV in NSE chart?
    please give clarity.
    thanks

    • Karthik Rangappa says:

      As far as I know there are no charts where you can track the live IVs. Probably the India Vix is your best option. HV is the realized volatility in the past, and IV is what the market is expecting as on now.

  23. Vishal Javakhedkar says:

    I think this strategy is better suited for bank nifty weekly option, where you will start making profit once it move 1.5 % in either direction or stocks like Bhel which generally is very volatile, and yes as you said key is to buy when volatility at the lowest.

  24. Chandan says:

    Since the premium for ATM might be higher can we take this strategy on slight OTM strike?

  25. Rajesh Gupta says:

    Thanks for such a beautiful article on option. In your this chapter point no 11.4, there is a question from your side. After initiating straddle, as the market move, will your position still remain delta neutral???. I am not sure about the answer of this question. However i think, After initiating straddle, as the market moves, the strategy will NOT BE DELTA NEUTRAL. But i don’t know how to keep it Delta neutral. Please gives us more insight on this.

    Thanks
    Rajesh Gupta

    • Karthik Rangappa says:

      You are right Rajesh. After you initiate the position, and when the market moves…the position will not be delta neutral. I will try and put up an additional chapter (but not anytime soon) related to this topic.

  26. amit gupta says:

    for long straddles,it is necessary to buy at ATM only ,or choose to buy whether the least volatility at both CE&PE .because it is quite rare to get the low volatility at ATM ,so suggest ,whether choose to buyat strike where volatility would low compare to other strikes ,whether it is otm/itm ,not necessary at ATM.Kindly suggest.

    • Karthik Rangappa says:

      If you choose low volatility strikes, then chances are you will pick two different strikes (as its hard to find the same strike at which vols are low)…and therefore it will not be a straddle.

  27. Dwaipayan says:

    I have one confusion, when you are calculating the final price of the option , you are showing the difference between the purchase price and the intrinsic value. This holds good in case of a contract , but if we compare the spot price of the contracts at the day of expiry both the call and put option values reach close to zero. Thus , when the market squares off my position will it pay me the difference on basis of intrinsic value of the option or the spot price ?

    • Karthik Rangappa says:

      I’m a little confused with your question. Can you please quote with an example? The intrinsic value will be zero, if the option is OTM.

      • Dwaipayan Chakraborty says:

        Ok let me rephrase and make it simpler, the LTP for NIFTY CE 8400 for Sep 29,2016 Expiry as on close of Sep 29,2016 was 188.3, as the price of underlying asset i.e NIFTY was 8591, the intrinsic value of the contract should be 191, so after the exchange squares off the option on expiry what is credited to my account, 188.3 or 191 ?

  28. amit gupta says:

    I have read all your chapters and find long straddles and long strangle both are similar ,only difference moneyness selection .please clear the doubt while execution of buy CE&PE in long strangle must be same time or i can execute at different time interval .and generally delta would never be zero in long strangle ,and it is also possible the liquidity and OI would not be available in one of the OTM moneyness during execution ,then what would have to do ,Should wait for time passes ,kindly elaborate with certain example ..

    • Karthik Rangappa says:

      The idea behind both the strategies is to execute them at same point. Executing at different intervals may not really give the desired outcome of the strategy.

  29. Vishal Javakhedkar says:

    Hi Karthik,
    I am able to apply this strategy on weekly banknifty and success rate has been closed to 70% but issue is with stoploss, in case bank nifty doesn’t move I am not able to take a decision when to put stoploss and because of it I am still in loss position. any input on the scenario?

  30. amit gupta says:

    Hi Karthik,

    Can you suggest books or online availability of data for knowing depth knowledge of technical analytics ,and also suggest some free trading platform so i can execute my trade ,I have done enough paper trading,in which 90% were perfect ,but when i actually started on pi ,result was different due to my sentiments .I have done day trading most of the time .so suggest accordingly .

  31. Bhaskar says:

    Hi please let me know following trade can I execute or not?

    SBI market price 250
    CAll buy OTM 235 = 1.85 rs
    Put buy OTM 275 = 1.85rs
    if sbi price moves to 270 then following is the scenario
    CAll value 235 = 0.85 rs
    Put value 275 = 3.85rs
    I can square off it and take profit or sbi should reach strike price??

  32. Sachin Jain says:

    Is it a good time to entering in Long Straddle Strategy as the market is moving very fast in either directions. Should we enter into Dec’16 7900 call and put. The call premium is 229 & put is 133.

    • Karthik Rangappa says:

      If you have the conviction, you should 🙂

      If you do not have the conviction, then you need to ask yourself – why so? Probably, you will be required read up and understand more 🙂

  33. Kavi says:

    Really very helpful chapter crack Long for straddle strategy ,easy to understand .Thank you for upload .but mostly i like to making position in sort straddle .

  34. Sandeep says:

    Thank you sir,
    I am zeroedian.
    Very good work sir.

  35. Varun says:

    Is it possible from your end to share the Nifty options data for 16 years? It’s a pain to download manually from nse site.

    • Karthik Rangappa says:

      Options is not more than 10 years old in India 🙂

      Btw, this may not be possible from our end. I’d suggest you speak to a licensed data vendor like ‘True data’ for this. Good luck.

  36. hasmukh chouhan says:

    kindly add option chain in pi including live greeks .so its very useful for option traders as provided in sharekhan

  37. Sarath says:

    Hy karthik

    “‘Delta Neutral’ and Delta Neutral strategies are insulated against the market direction.” what is the meaning of this…Delta neutral means position not making money either market move up or down right? why we use delta neutral in our strategy ? is there any perticular time ? please help karthik ,,,,i am very confusing this word “delta neutral”

    Thanks
    Sarath

  38. K R Ashok says:

    Hi,

    In the money options has very high premiums. Why can’t I short slightly ITM and collect the premiums?

  39. NK says:

    I think the below statement is incorrectly framed. 1% move over and above the 2.2% will give ~75 points to Nifty Index which will increase the premium and the profilt should be calculated on this increased premium. So the sentence “profit of atleast 1%” seems incorrect.
    “Further if you want to make a profit of atleast 1% on this trade, then we are talking about a 1% move over and above 2.2% on the index.”

    Do correct me, if i am wrong. Thanks.

    • Karthik Rangappa says:

      Are you doing this calculation based on current Nifty prices? Anyway, let me check this. Thanks for pointing anyway.

  40. Pawan says:

    as banknifty is very volatile can we make this strategy on daily basis on opening for 5 points daily

  41. Rajiv says:

    Hi Sir, for may 7th french elections, there may be volatility predicted. So on May 4th (Thursday) by 3 pm can I buy NIFTY ATM CE and ATM PE for a long staddle (for may series)? and exit on early morning trade on May 8th (Monday) by 9.20 AM. there is a one day in-between buy and sell for the volatility to go up. is this a sensible trade set up. please clarify. Thanks.

    • Karthik Rangappa says:

      Yes, you can. But its best if you can close the position just before the event. I’m saying this purely out of my personal experience.

  42. Virochan Prabhu says:

    Do we have any site where we can see all fno stocks with its current volatility to understand higher n lower volatility stock to plan for straddle ? as its difficult to check stock one by one to understand which stock has less volatility

  43. Sai Sreedhar says:

    When you say “The volatility should be relatively low at the time of strategy execution”, which volatility will you refer to. When Put Option (Implied) Volatility increases the Call Option (Implied) Volatility Decreases and vice-versa. So how would it be practical to get both side strikes at low Volatility? Or are you referring to the volatility of the underlying itself, like when there is Bollinger Bands Squeezing and Ranged/Forming of Doji candle kind-of situation? Or is it the volatility of the overall market gauged by something like Vix?
    I was wondering if this is practically achievable?

    • Karthik Rangappa says:

      Sreedhar, I’m talking about the IV of a particular strike. All else equal, the IV of a call and a put for the same strike should be same.

      • Sai Sreedhar says:

        Ah, Thanks SO much for clarifying Karthik!
        So if I understood correctly, these are the conditions to initiate the Long Straddle:
        1. Strike of CE = SPOT = Strike of PE
        2. Delta of CE = (-) Delta of PE = 0.5
        3. IV of CE = IV of PE
        How much should we consider margin of error here – I mean 1% above or below the conditions should hold good or we have to consider more room for adjustment?

        • Karthik Rangappa says:

          Yes, most importantly, I’d look for the volatility. If you are going long straddle, then it’s best if the volatility is low and expected to go higher soon. If you are shorting a straddle, it’s best if volatility is at an elevated level and expected to go down soon.

  44. SANDEEP says:

    thank you karthik rangappa.
    and also SAI shreeder for sharing valuable knowledge.

  45. ZD2412 says:

    Hi,

    For the below point:
    “The volatility should be relatively low at the time of strategy execution”

    Please let me know how to find the volatility is high or low at the given point of time. Tried reading volatility chapter but couldn’t make out.

    Example, i have to execute the trade now, i need to decide based on the volatility to find the right time, how can i do this.

    Help much appreciated and the articles are too good.

    Thanks,
    Sundar

    • Karthik Rangappa says:

      In such cases, you can quickly check the current implied volatility and compare it with the historical volatility. Both these volatilities are published on the NSE website, and I guess I have shared the links in the earlier comments.

  46. Priya says:

    Dear Karthik Sir,
    First of all thanks for this wonderful module provided by you. 🙂
    I have an issue regarding LONG STRADDLE, I’m asking with help of following example:

    On 1 March 2018, ADANIENT spot = 199.15. Thus, I decided to apply long straddle blindly 🙂 🙂 🙂
    Okay Jokes apart. Back to the point,
    I selected strike price = 200CE & 200PE. And, lot = 4000 & EXPIRY – 28/3/2018
    Buy ADANIENT 200CE = 10 premium paid
    Buy ADANIENT 200PE = 7.7 premium paid

    On 26 March 2018,
    ADANIENT 200CE = 0.1
    ADANIENT 200PE = 39.9

    (1) Can I close both these leg-positions before expiry?
    (2) Profit = (CE)+(PE) = (-9.90)+(32.2) = 22.3 Is it correct?
    (3) Can I close CE & PE positions in 1 day by taking profit of premium difference?
    (4) Is my Question No. (2) calculation is correct?

    Thanks Karthik Sir.

    • Karthik Rangappa says:

      1) Yes, you can close both the positions before expiry – in fact, I’d suggest you close this rather than keeping it open
      2) Yes, that is correct. Or you can look do this – you paid a net of 17.7 and if you square off you will get 39.8. Hence you make 22.3 as profit
      3) Yes, you can
      4) Yup.

      Good luck, Priya.

  47. Hari Haran says:

    @Karthik . Thanks for putting effort to prepare all these topics so new bees like me can an great understanding.
    I needed an help in options as all your explanation doesn’t consider STT applied after exipry. https://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx.
    How do u think this will effect trading options ?

  48. neel says:

    Message from NSE
    Dear, your traded value for 06-06-2018 CM Rs 240000.
    What does it mean i have to pay this amount?

  49. Anand says:

    @karthik,
    I have one basic question, please consider below example

    BankNifty weekly expiry: 21June 26500CE
    Scenario 1: Buy Price: 50 Sell Price: 70. Profit = 20*40 = Rs 800/-
    Scenario 2: Buy Price: 50 Sell Price: 40. Profit = -10*40 = Rs -400/-

    Is the above profits correct? In your examples, we are completely subtracting the premiums paid. Please clarify

    • Karthik Rangappa says:

      Yes, you can simply take the difference between the buy and sell price of the premium, multiply it with lot size and get the P&L.

  50. Aksh says:

    When we buy a straddle. The strategy will no more be delta neutral when the market starts to move.

    If the morket moves up delta and gamma of the call option would go up. As the option will be moving from ATM to ITM. at the same time the gamma and delta of Put option wil be decreasing as the put option will be moving from ATM to OTM. which will result in net profit for every point the market moves.

    Same scenario with put option in case the market goes down.

    Am I right?

    If we apply the straddle for intraday or swing trade with a long expiry,Do u think it will be more benificial ? as the effect of theta will be less and both call and put premium will hold some value and will not expire at zero.

    This strategy is best suited when we expect the market to move a lot in either direction bcz of election result ,quaterly result, RBI rates, correction phase of market etc. If we expect the market to move substantially we should place the trade some time before we expect the maeket to move. As near the announcement or other event the IV will be high which will offset any gain which we may make. If we apply stradle before some time we expect the market to move we may even gain from high IV at the time of announcement. Am i right in thinking so?

  51. Aksh says:

    EDIT :
    When we buy a straddle. The strategy will no more be delta neutral when the market starts to move.

    If the market moves up delta and gamma of the call option would go up. As the option will be moving from ATM to ITM. at the same time the gamma and delta of Put option wil be decreasing as the put option will be moving from ATM to OTM. which will result in net profit for every point the market moves.

    EDIT : HOWEVER THIS SITUATION IS ONLY VIABLE WHEN THE MARKET MOVES TO A LEVEL WHICH CHANGES THE ATM STRIKE FROM THOSE WHICH WE HAD BOUGHT IN THE STRADDLE. AM I RIGHT?

  52. Aksh says:

    EDIT :

    In the first scenario about making gain in long streaddle for every point the market moves, i would like to add the following :

    EDIT : HOWEVER THIS SITUATION IS ONLY VIABLE WHEN THE MARKET MOVES TO A LEVEL WHICH CHANGES THE ATM STRIKE FROM THOSE WHICH WE HAD BOUGHT IN THE STRADDLE. AM I RIGHT?

    AND THIS SITUATION IS ONLY VIABLE WHEN THE % OF CAPITAL INVESTED IN BOTH CALL AND PUT OPTION IS THE SAME. AM I RIGHT?

    WILL THIS STRATEGY STILL BE A LONG STRADLE ? AS IF WE INVEST EQUAL % OF CAPITAL IN CALL AND PUT OPTIONS INSTEAD OF EQUAL LOTS , THE DELTA MAY NOT BE ZERO. I THINK IT WONT QUALIGY FOR A LONG STRADDLE

    I JUST WANT TO MAKE SURE MY BASICS ARE CLEAR

  53. deep says:

    i think long straddle works for banknifty as it is highly volatile and 200 points move is not a a big deal for banknifty

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