Dear AW10 sir,
Is it typo?....OTM or ATM?
Is it typo?....OTM or ATM?
Strangle strategy has 2 legs consisting of
Buy a Call + Buy a Put.
Now u can play around with strike price of each leg and make them ITM/OTM/ATM.
So when I buy 5100 CALL, and mkt is at 5050, it is OTM.
Similarly when I buy 5000 PUT when mkt is at 5050, it is also OTM.
hence the strangle created by 5100 C + 5000 P is OTM strangle.
In theory/books, most of the time, they talk about only ATM strangle.
OTM = market needs to move before the strike+option type (call/put) combination becomes valueable and start carrying some intrinsic value.
Till the time that move does not happen, these option have only Time value.
So, for a change, this time I did not make typo .. but OTM strangle is correct.
Why I selected OTM strike in this case ?
1) Cause I am anticipating a breakout move after extended consolidation hence one of these strikes will certainly become ITM. And once I know the breakout direction, I can adjust the position after seeing the market action.
2) They cost less
3) As they are quite near to ATM, so even if mkt goes to 5150, my 5000 put would not change drastically cause it is still within reach of market range for remaining 10 days of this month..
4) And if I am lucky and the breakout happens to be false, then I might end up winning on both the legs. Say if it breaks to prev high 5180 level..and selling comes in there.. so i can book profit on 5100 call... and still hold 5000 put.. or maybe use this profit to buy more Puts and scale in my position.
Hope it clarifies your doubt and give u insight into how I am trading. (ofcourse, I do get it wrong many times but ).
Happy Trading