Long Straddle Strategy in Tamil

This session is all about the long straddle strategy in options trading. In this strategy, the market view must be one-sided. The market may either go up or down based on the news. Some of my friends used to make investments on Friday because on Monday when the market opens there would be a gap up or gap down due to the weekend. At those times, either a call option or a put option gives the profit. On Thursday, when the volatility is high on the expiry day or when a person speaks about the interest rate in RBI or any such news affects the market in such a way that NIfty moves from -200 to +200 points or the flat market moves to negative, when you buy a call or put option, the premium in one side decreases whereas the premium on another side increases. There is only a minimal risk in this strategy.

For example, on an expiry day, the premium on both sides is less. In the case of Bank Nifty, the premium amount is 37500 and the strike value is around 37000 and it is the same for both call and put options. The strike value is at the money. You are buying the call option with a premium of 30 and the put option also at the premium of 30. When the European market goes up above 400 or 500 points from 37500, the premium of the put option gets eroded and the premium of the call option increases from 30 to even 150. On deducting the premium amount on both sides i.e, 30+30=60 from 150 is the profit you obtain. The premium you pay is the only risk here. When the market goes one side, you would obtain a maximum return. When the market is neutral, both the premium erodes to zero leading to premium loss. You can take the risk only when you predict the market moves on one side. In at-the-money, when the delta value in the Greek calculation goes sensitive, the strike moves to in-the-money. The premium also moves in the direction of the market.

The main disadvantage of this strategy is the time decay. In a weekly expiry, on buying the premium when the market is neutral, the premium gets eroded. Hence it is safe to enter and exit quickly. 

Here is an example of the long straddle strategy. This is a small illustration or practice trading. I have selected the Bank Nifty. The long straddle involves buying and the short straddle involves selling at the same strike. I have bought 37500 at the strike price on both sides of call and put options. I have bought the call and put options. The premium which you buy is the investment. The premium for the call is 304.95 and for put, the option is 333.55. These two premiums are your total investments. You can even buy a premium for 50+50=100 to attend this long straddle strategy. Last Thursday, when the market traveled on one side, you would obtain a decent profit. The market should not move to neutral in this strategy.

The intention of the market should be one side that can be either upside or downside. When the market goes upside, the put option erodes completely and the call option gives you the profit. The probability of success would be 49.89%. The maximum profit is undefined because you can obtain the profit to an extent in which the market moves one side. The maximum loss is the total premium that you buy on both sides. When the market remains at 37300 for the next three days, then both the premium gets eroded. On the expiry day, the extrinsic value at-the-money becomes zero. The breakeven is at the range of 36662 to 37938 i.e, the values above 36662 and the values below 37938 give the profit. The total margin is 15962. 

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Here comes a calculator that helps you to understand better. When the market ends at the range of 37300, you would obtain a loss of around 16000. The market has to end at 600 points above 37300 to obtain a profit in the call option and the put option erodes to zero. When the market ends at 38300, the put option erodes to zero and the call option gives you a profit of about 14817. When the market ends at 36300, the strike moves to in-the-money and the put option becomes the most active contract in-the-money providing a profit of 19100 and deducting the call option loss you would obtain a total profit of 8900. This strategy works only when the market moves to one side to a larger extent.

The range is very wide with 600 points on the upside and 600 on the downside i.e, in total 1200 points. You can obtain the profit only when this range breaks out. This strategy can be applied at times of high fluctuations or you can apply it on the Friday market and wait for it in the Monday market. You can try this last Thursday or weekly expiry with less premium. In this example, you are initiating the trade by buying a premium of 16000. You can even try this trade with an Rs.50 premium on both sides. The total investment needed is 2500. You can obtain a profit on one side even though there is a loss on the other side. You can practice this on paper and can start the trade with a minimum of 2500. This is high-risk trading. If you do not consider a loss of 4000 in buying a premium at 2500. You can attempt this strategy.