Option Selling Strategies | Strangle and Iron Condor

Summary

This video script delves into the strategy of option selling, specifically the 'Strangle' technique. It emphasizes the high probability of profit for option sellers compared to buyers, highlighting a 90% chance of success due to the nature of out-of-the-money options. The speaker promises a series of videos to explain effective option selling, discussing risk management and the benefits of the 'Iron Condor' strategy. The script also touches on the importance of the compound effect for long-term wealth accumulation, recommending the book 'Compound Effect' for further insight and offering a discount code for an audiobook platform.

Takeaways

• 📈 The script discusses the 'Strangle' strategy in options trading, emphasizing its effectiveness for those with jobs and salaries.
• 📚 The speaker plans to release a series of 7-8 videos on option selling to explain the basics and management strategies in detail.
• 💰 The probability of profit for option sellers is highlighted as being significantly higher (90%) compared to option buyers (10%).
• 🔢 The concept of 'Probability of Profit' is introduced, suggesting that option selling has a higher chance of profit due to the nature of out-of-the-money options.
• 🌱 The importance of the 'Compound Effect' is stressed, advocating for slow and steady wealth accumulation over time rather than seeking quick riches.
• 📘 The speaker recommends the book 'Compound Effect' for further understanding, with a suggestion to listen to its summary on KUKU FM for those who prefer audio.
• 🎧 KUKU FM is presented as a platform for audiobooks and book summaries, with a special discount code 'LM50' for Learning Markets users.
• 🤔 The script explains the difference between a 'Strangle' and an 'Iron Condor', with the latter involving additional hedging to define risk more clearly.
• 📊 A detailed example is given on how to calculate and execute a Strangle strategy, including considerations for market swings and strike prices.
• 🚫 The script warns against the unlimited risk associated with Strangle if not managed properly, advising on exit strategies to limit losses.
• 🛠 The use of 'Greeks' in options trading is introduced, explaining how they can help in choosing appropriate strike prices and managing risk.

Q & A

What is the main topic discussed in the video script?

The main topic discussed in the script is the concept of option selling, specifically the 'Strangle' strategy, and how to manage it in the context of stock market trading.

What is the 'Strangle' strategy in options trading?

The 'Strangle' strategy involves selling out-of-the-money call and put options simultaneously, with the expectation that the underlying asset's price will stay within a certain range, allowing the options to expire worthless and the seller to keep the premium.

Why are option sellers more likely to be profitable compared to option buyers according to the script?

Option sellers have a higher probability of profit, estimated at 90%, because they benefit from the time decay of options and the fact that out-of-the-money options are less likely to end in-the-money compared to the 10% chance for option buyers.

What is the compound effect mentioned in the script, and how is it related to option selling?

The compound effect refers to the process of growing wealth gradually over time through the accumulation of small profits. In the context of option selling, it means consistently making small profits from selling options, which over time can significantly increase one's capital.

What is KUKU FM, and how does it relate to the script's discussion on the compound effect?

KUKU FM is an audiobook and book summary platform where listeners can access thousands of audiobooks and summaries. The script suggests listening to the book summary of 'Compound Effect' on KUKU FM to understand how accumulating small amounts of money over time can lead to significant wealth.

What is the difference between a 'Strangle' and an 'Iron Condor' as mentioned in the script?

The difference between a 'Strangle' and an 'Iron Condor' is that an 'Iron Condor' adds 1-2 legs of hedging to the 'Strangle' strategy, which helps to define the risk more clearly and manage the trade more effectively.

How does the script suggest managing risk in the 'Strangle' strategy?

The script suggests managing risk by setting a maximum loss level, adjusting the trade by buying options to hedge, and exiting positions when the market moves unfavorably to limit potential losses while maximizing profits.

What is the significance of the delta in the context of the 'Strangle' strategy discussed in the script?

Delta represents the sensitivity of an option's price to changes in the underlying asset's price. In the 'Strangle' strategy, sellers look for options with lower delta values (e.g., 0.2 or 0.25) to write, as these options are less likely to be affected by small price movements, providing more time to react before the options become profitable for the buyer.

How does the script describe the process of adjusting a 'Strangle' trade to maximize returns?

The script describes adjusting a 'Strangle' trade by buying back the call option if the market moves upwards and leaving the put option, or vice versa if the market moves downwards. This dynamic adjustment helps to fix the loss on one side while potentially profiting from the other.

What advice does the script give regarding the frequency and consistency of option selling to grow capital?

The script advises to perform option selling consistently, adding small profits over time, which can then be used to increase the quantity of options sold. This approach allows for compounding capital growth, with the potential to increase the quantity of options sold every 1.5 to 2 months.

Outlines

00:00

📈 Introduction to Option Selling Strategies

The speaker introduces the concept of option selling, emphasizing its higher probability of profit compared to option buying. They mention an upcoming series of 7-8 videos that will cover the basics of option selling, management of adverse market conditions, and the differences between strangle and iron condor strategies. The importance of the compound effect in growing wealth slowly over time is highlighted, along with a recommendation to listen to 'The Compound Effect' summary on KUKU FM for more insights.

05:03

🔄 Detailed Calculation of Strangle Strategy

The speaker explains the strangle strategy using the Nifty index, detailing the margin requirements and potential risks. They discuss the market's support and resistance levels, emphasizing the importance of analyzing swing highs and lows. The example shows a practical approach to selling options at different strike prices and calculating the margin requirements, risks, and potential profits.

10:04

⚖️ Adjusting and Maximizing Strangle Strategy

This section covers adjustments to the strangle strategy to minimize risk and maximize returns. The speaker introduces buying options at different strike prices to hedge the position, which reduces margin requirements and fixes potential losses. They explain the importance of monitoring the delta and adjusting positions based on market movements. The strategy's profitability is analyzed, and the benefits of compounding returns over time are discussed.

Keywords

💡Strangle Strategy

The 'Strangle Strategy' is an options trading technique where a trader sells out-of-the-money call and put options simultaneously, expecting the underlying asset's price to remain stable within a certain range. In the video, the speaker discusses this strategy as a way to profit from a market that is not expected to move significantly, emphasizing its high probability of profit due to the nature of option selling.

💡Option Selling

Option selling refers to the act of selling financial options contracts to buyers, where the seller has the obligation to fulfill the terms of the contract if the buyer decides to exercise the option. The video focuses on the benefits of option selling over buying, highlighting the higher probability of profit for sellers due to the statistical likelihood of options expiring out of the money.

💡Compound Effect

The 'Compound Effect' is a financial concept that describes the process of accumulating wealth over time through the reinvestment of earnings, leading to exponential growth. The speaker mentions a book on this topic and emphasizes that successful option selling involves growing capital slowly over time, which aligns with the compound effect principle.

💡KUKU FM

KUKU FM is mentioned as an audiobook and book summary platform where listeners can access summaries of various books, including one on the compound effect. The speaker suggests using this platform for those who may not have the time to read, providing a code for a discount, which illustrates the practical application of learning tools in financial education.

💡Iron Condor

An 'Iron Condor' is an options trading strategy that involves selling a strangle and simultaneously buying in-the-money call and put options to limit the risk. The script differentiates between a strangle and an iron condor by explaining that the latter includes additional 'legs of hedging,' thereby defining the risk more clearly for the trader.

💡Delta

In options trading, 'Delta' measures the sensitivity of an option's price to a $1 change in the price of the underlying asset. The speaker uses delta to explain how option sellers can gauge the potential movement of the market and make decisions on when to adjust their positions, as the delta values change as the underlying asset's price approaches the strike price.

💡Margin Requirement

The 'Margin Requirement' is the amount of capital that must be set aside by an investor as a guarantee for trades, particularly in options selling. The script discusses how the margin requirement for selling both call and put options is less than for selling a single option, which can be a strategic consideration for traders.

💡At the Money

An option is considered 'At the Money' when its strike price is equal to the current market price of the underlying asset. The video script contrasts the probability of profit for option buyers and sellers, noting that there are fewer chances for buyers to be at the money, which affects the likelihood of profit.

💡Out of the Money

An 'Out of the Money' option is one where the strike price is not advantageous compared to the current market price of the underlying asset. The speaker highlights that selling out-of-the-money options has a higher probability of profit for sellers, as there is a greater likelihood that these options will expire worthless.

💡Greeks

In options trading, 'Greeks' are a set of mathematical calculations used to measure the risk of an options position. The script mentions Greeks in the context of choosing strike prices for selling options, indicating how these metrics can help traders understand the potential impact of market movements on their positions.

💡Sensibull

Sensibull is a trading platform that provides options for trading and analyzing financial instruments. The speaker refers to Sensibull when discussing how to view the delta of an option, which is a key metric for traders using the platform to make informed decisions about their options selling strategies.

Highlights

Introduction to the Strangle strategy for those with jobs and salaries, emphasizing its quiet follow-through.

Explanation request on how to write and manage Strangles, especially in adverse market conditions.

Announcement of a new series of 7-8 videos on option selling basics.

Discussion on the probability of profit in option selling versus buying, highlighting a 90% chance for sellers.

Emphasis on the importance of the compound effect in growing wealth slowly over time.

Recommendation to read or listen to summaries of the book 'Compound Effect' for financial growth insights.

Introduction of KUKU FM as a platform for audiobook summaries, with a special discount code for users.

Detailed explanation of the Strangle strategy, including risk management and profit probability.

Definition and explanation of the Iron Condor as a variation of the Strangle with added hedging.

Market analysis approach based on the assumption of limited market swings for setting Strangle levels.

Technique of using index charts to identify swing highs and lows for Strangle strategy setup.

Calculation of margin requirements for selling options and the benefits of selling both call and put options.

Risk assessment of the Strangle strategy, including unlimited loss potential and the importance of exit strategies.

Use of Greeks, specifically delta, to determine optimal strike prices for Strangle strategy.

Adjustment strategy to maximize returns and minimize risks in option selling.

Fixed loss and profit potential with the adjusted Strangle strategy using additional option buying.

The concept of gradually increasing trade size to compound profits over time.

Guidance on using delta values to decide when to exit positions in the Strangle strategy.

Encouragement to like the video for more informative content on option selling strategies.

Transcripts

When we had uploaded the video last week

The people having job and salary

They should quitely follow the Strangle strategy

Many people responded that

Sir explain one time in detail

That how can we write strangles

And how can we manage it

Incase if market is adverse

So now I am starting selling series also

I am going to do 7-8 videos in option selling series

So I will explain you all the basic things

So that you can do option selling in an effective way

And why are people becoming successful in option selling

And why options buyers are not being successful

See there is one thing called probability of profit

Probability of profit of option buyers

Is less

There are 10% chance that

You will be in profit

But option sellers

Probability of profit is 90%

Why?

Because in option buying

There are less chances in at the money strike price

That you may not earn

But in option selling

There are very much chances in out of the money options

And there is 90% probability

That you may earn money

So now we will discuss that in detail

And with option selling

No one can become millionaire in a day

Understand this first

Slowly slowly over a period of time

Your money increases slowly

Which we called as compound effect

Now see there a book also on compound effect

In detailed

You read that book

It is very good

But if you cannot read that book

Then you can listen the book summary of that book

On KUKU FM

KUKU FM is a leading audiobook

And is a book summary platform

Where you can listen thousands of audio book and book summary

But definitely listen compound effect

It will tell you how slowly

By gathering one one penny

You can grow your money

So always take care

That we cannot grow money in one day

You will have to grow money slowly

You will get the link of KUKU FM in description

You use our code

LM50

Learning Markets 50

With that you will get 50% off

And it is valid for first 250 users

Now we will come on our Strangle discussion

See what is strangle

I will tell you about strangle and iron condor also

I will tell you both the things

So that from that you can understand

That how you can manage your risk

And we will know what will be the maximum loss

And what will be the probability of profit

We will discuss in detail right now

So see

What is iron condor

You add some legs of hedge in strangle

What is its benefit that also I will explain you

So the difference between iron condor and strangle is

That you add 1-2 legs of hedging

So we call it as iron condor

So basically it is a strangle

In which your risk is defined

Now we will come on discussion of strangle

Suppose, right now market

Yesterday closed on 17800

Now you know that

If market has closed on 17800

Then there are a lot of chances

That market will not swing more than 300-400 in a week

Fine

So you think that market will not swing more than 300-400 points

That you assume

So on the basis of that assumptions

Now we will try to do detailed calculations

And that try is how much effective

That also I will try to explain you

And slowly slowly

We will compound money

Then only you will have a big capital

And then from that big capital

You can do big option selling

And with that capital will multiply more

This thing is only compound effect

Now we will come

See, suppose I want to write strangle

So, I came on this

Now when I want to write strangle

Then what I want to do

First I will see index is at what level

Right, so now

I will do one thing

I will open index chart

So if you will come in the index chart

What will you see

Swing high, swing low

You will see

Now we will open Nifty chart

Then we will see

Now this is Nifty chart

If you will see

Market has taken 3 times rejection form 18080

So you can assume this level as a hurdle

So what was the strike price near 18080

18100

I am taking decision

So when I will sit to do option selling for next week

Then in option selling first I will think

18100 is swing high

And I have to be safe from that

So I will first see 18100

What is the price of CE

18100 CE

We will make it market

And we will make it overnight

And we will sell it

So I have added it

Now what is the margin requirement I can see

91000

This margin requirement because it is high

To sell 1 lot also this much is required

So many people don't do it

But now I will show you this in a different way

Now see what is swing low

Market has taken good momentum from around 17500

And market has taken hold at 17650

So we can assume that for that day

17500 is a good support

Right

So now we will come on 17500

So 17500

13th march PE

We want to sell this

Market overnight

Ok

So we have to add this

Now we have done sell for both

What is the margin requirement to sell both

108000

If we are selling of both the sides

Then the margin requirement is less

This is clear

When we are selling 1 then 93000 was required

When we are selling both the side then 112000- 111000

It can be done

But if we analyse this

Then what risk you can see

If we analyse this

Then the risk you will see

And then you will say, sir this is not a good strategy

Now you see what is the probability of maximum profit

3000/-

So in 1 week on 1 lakh, 3000 is the maximum probability

But how much is the risk

Unlimited

But how much is the probability of profit

75

and no one

That you wait till unlimited

If market

Starts increasing

Suppose it went upto 18200-18300

Or if it went upto 18050

Then you start to exit

No one has told you that

You wait till unlimited risk

If at 18050 also, suppose

I do it 18080

On 18080 also

If expiry is there

Then your loss will limit to 1000

So if you are going to 18080 also

Then you know that you can exit

And this is just for monday

If we hold at expiry

Then in 18080 also

You will get some profit

Right, until market is not coming out of 18162

And does not go out of 17437

You will not go in loss

Now if I do this 18180

Then you will have some loss

Then you will have loss of around 1000

So what do you mean by this

You are safe up to 100 points extra

What is the meaning of 100 points extra

See, 35 point and 26 point

This point you are getting

You are gettin 61 points

So on both the side

61-62 points of 18100

And 17500 of 60-61 points

You are safe

So you will get time to make decision

Plus Nifty does not run 200 points in 1 minute

Bank Nifty can run

Nifty does not run that much

So you will get time to adjust

And if the day is very bad then no problem

But it will be 1-2 times in a year

Remaining time you will have 75% chances

To make profit

Now I will show you Greeks

That why I have chosen this strike prices

These greeks

This is showing -50

On expiry

But If I

Wait

If I

I come at 2 days to expiry

On 11th April

Then its delta is 0.36

If our combined delta is 0.36

Then, and now we will come on current price

I will reset this

So if I reset this

Then technically there is no delta in this

Right

Because, it is a bit far

But there is some delta

If I increase it by 30-40-50 points

Then you will see the real effect of delta

It came near 0.4

Now I will take it upto 18000

It came up to 0.3

What does this mean

It came up to 0.2-0.3

It means that now delta effect has started woking

Means, how much time you are getting

In delta effect coming

If the market is at 17800-17900

Then delta is not working at all

It reached near 18000

Delta started to work that also slow

What does this mean

You will benefit

If market will run very fast also

Then slowly slowly

You will get time to adjust

You will get time to think and understand

Market will not run at a time

So this effect of delta

You have to take care

But, you for this 3000 you took risk of 1,00,000

But now I will tell you an adjustment in this

Due to which you can maximize the return

Now what we will do

Nifty 18300 CE

We will buy

Fine

We are getting in 11 rupees

I have added this

And

Nifty 17300 PE

I have added this also

Now you see what is the margin requirement

42000-43000

We require 46000 to execute this trade

And margin requirement comes to 46000

So you saw that

You will be able to write 1 lot

Now we will see probability of profit in this

Which we had seen

Because you are also buying option

So there is some less percent chances of profit

Now you see

Your maximum loss is fix, 8000

Now what is the maximum profit

2000 rupees

So your profit is fixed 2000

And loss is fixed at 8000

So now our maximum loss can be 8000

But when this will happen

When you will leave this open

That let whatever happen

Sometimes we do this

That we will see whatever happens

If you will leave that then also your loss is limited to 8000

And you have earned 2000 in 42000

How much you had earned at 1,00,000

You had earned 3000 rupees on 1,00,000

Now, if we increase this

We will increase the quantity

We will make all 2 lots

So if we will make all of them 2 lot

Then we, roughly in same margin

Roughly in 92000 margin

How much will we earn

Around 3900

That means in 92000 margin we are earning 4000

Fine, and this I am recording today on saturday

And this is expiry

This time on wednesday only

If the expiry is till thursday

Then these premiums are a bit more

And that bit more premiums

Gives you some more return

So your loss is fixed

Your profit is fixed

And after that as slowly slowly

Your levels will come

If you are afraid

Then think of leaving

If you think market has reached 18001

Then we should exit

Then you exit from call side

Leave put side

Return will keep on coming on put side

You exit call side

So in this way

You can fix your loss

And you can maximize the profit

And one can do according to his capital

And this every week

If you will add 3000

You will be able to increase the quantity

You will be able to increase quantity after every 1.5 month

After 2 months

You will be able to do 3 quantity

After its 1 month

You will be able to do 4 quantity

You will be able to increase the quantity every month

So this is the first benefit of option selling

I have told you the simplest strategy

Which option sellers use

Where you have to see delta

I will tell you where you need to see delta

And generally, option sellers

0.2 delta

0.25 delta

Write options

Those who strangle

Write 0.2 or 0.25 delta

Now how they see

I will tell you

Nifty 18100 CE

Fine

Now in this

I will go in option chain

See

Whenever you will see

In this

Then in sensibull generally

Delta is not normally given

But over here

You will click delta

You will be able to see delta

Now you notice

Then 18100 about which we were talking

How much is the delta of 18100, it is 0.21

How much is the delts of 17500, it is 0.15

What does this mean

This means that

Index will move 100 points

Then this will move 20-21 points

And on put side

It will move 100 point

Then this delta will move 15-16 points

There is soe gamma effect also

So delta increases fast

But overall you will get time to think

Because Nifty takes time to increase 100-150 points

Suppose, it increases 1 candle sometimes

But our that day is bad

Right

So it will increase slowly

You will be able to adjust in the slow increase

Even if you will not be able to adjust

Then atleast call side

Suppose call side is increasing

Then if market is going upwards

Then you exit call side

Leave put side

Now if put side is increasing

Then keep call side, and exit put side

So anyone side will give you return

If you will keep on doing this slowly

Then over a period of time

Money will compound slowly

If you liked the video

Then Like it