Option Selling Strategies | Strangle and Iron Condor
Summary
TLDRThis 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
- π The script discusses the 'Strangle' strategy in options trading, emphasizing its effectiveness for those with jobs and salaries.
- π The speaker plans to release a series of 7-8 videos on option selling to explain the basics and management strategies in detail.
- π° The probability of profit for option sellers is highlighted as being significantly higher (90%) compared to option buyers (10%).
- π’ 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.
- π± The importance of the 'Compound Effect' is stressed, advocating for slow and steady wealth accumulation over time rather than seeking quick riches.
- π 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.
- π§ KUKU FM is presented as a platform for audiobooks and book summaries, with a special discount code 'LM50' for Learning Markets users.
- π€ The script explains the difference between a 'Strangle' and an 'Iron Condor', with the latter involving additional hedging to define risk more clearly.
- π A detailed example is given on how to calculate and execute a Strangle strategy, including considerations for market swings and strike prices.
- π« The script warns against the unlimited risk associated with Strangle if not managed properly, advising on exit strategies to limit losses.
- π 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
π 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.
π 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.
βοΈ 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.
Mindmap
Keywords
π‘Strangle Strategy
π‘Option Selling
π‘Compound Effect
π‘KUKU FM
π‘Iron Condor
π‘Delta
π‘Margin Requirement
π‘At the Money
π‘Out of the Money
π‘Greeks
π‘Sensibull
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
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Then Like it
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