"Straddle" In September Expiry
Authored On: 28-Sep-13
Last Modified: 28-Sep-13
One of the easiest and effective Option trading strategy is to go what is known as 'straddle'. This involves buying [or selling] 'at-the-money' Call as well as Put options jointly, with analytics guiding that price may move in either direction such that it will move either of option bought to a profit level of premimus that are more than combined premium paid. While there are many caveats that must be considered while playing straddle, there was an interesting scenario for Options traders near September expiry on NSE this week.
September at-the-money Calls and Puts  for Nifty were trading at relatively high premium of 70 and 56 rupees respectively. This if you were to buy a straddle, that would have resulted into a cost to you for somewhat higher figure of Rs. 60K, for about 400 entities [8 lots]. Instead, an immediate variation that was coming into trader's mind was to sell these options and pocket this 60K something, having been very close to expiry across next 3 days!
Indeed, this was a very good strategy and if you as a trader had sold these 8 paired lots, you had an optional great way to insure and insulate your first trade by buying same pairs of next month. We now had two scenarios. . .
1> Should market move fast in either direction before expiry, then either of current series options, that will be going out-of-money will fast degrade in its premium, much faster than next month series' out-of-money option that you bought. And at the same time, other in-the-money moving option of current series that you sold will gain much slower than next month series' in-the-money moving that you bought. Both legs thus are contributing to winning strategy.
2> Should market stay tepid, without much movement, as it happened, then both of current series options will fast degrade in price, much more than what will happen to next month series, profiting you in thus both legs! And that is what happened.
Track these two options of CE 5900 and PE 5900 for September and October series with past data that is now in hand with you and you will get to know this amazingly simple way to trade using above strategy for profits. Above diagram tries to explain that.