If the trader is bearish on market and bullish in volatility, he will implement this strategy. However the trader can be neutral in nature i.e. indifferent if the market moves in either of the direction, this strategy will make profits, but uptrend will give a capped income than downtrend which will give unlimited returns.
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 ..
Lower Break-even = Strike Price of Put - Net Premium, Upper Break-even = Strike Price of Call+ Net Premium
PUT BACKSPREAD Vs SHORT STRANGLE - When & How to use ?
PUT BACKSPREAD
SHORT STRANGLE
Market View
Bearish
Neutral
When to use?
This strategy is perfect in a neutral market scenario when the underlying is expected to be less volatile.
Action
Sell OTM Call, Sell OTM Put
Breakeven Point
Lower Break-even = Strike Price of Put - Net Premium, Upper Break-even = Strike Price of Call+ Net Premium
PUT BACKSPREAD Vs SHORT STRANGLE - Risk & Reward
PUT BACKSPREAD
SHORT STRANGLE
Maximum Profit Scenario
Maximum Profit = Net Premium Received
Maximum Loss Scenario
Loss = Price of Underlying - Strike Price of Short Call - Net Premium Received
Risk
Limited
Unlimited
Reward
Unlimited
Limited
PUT BACKSPREAD Vs SHORT STRANGLE - Strategy Pros & Cons
PUT BACKSPREAD
SHORT STRANGLE
Similar Strategies
Short Straddle, Long Strangle
Disadvantage
• Unlimited loss is associated with this strategy, not recommended for beginners. • Limited reward amount.
Advantages
• Higher chance of profitability due to selling of OTM options. • Advantage from double time decay and a contraction in volatility. • Traders can book profit when underlying asset stays within a tight trading range.
