Range Bound Options Strategies

Overview

My previous blog covered various bearish views of strategies, implicating that an individual who is having a bearish view on the particular Stock/index can adopt an appropriate strategy to gain maximum profits with a fixed amount of calculated losses (if any).  Similarly, in this blog we will cover Range Bound Options Strategies. These are strategies where, when an individual is expecting a range bound movement, he can take advantage of the same since he expects the prices to be in the stipulated range.

Range Bound Options Strategies

Some of the popular range bound options strategies are:

1. Strangle - Short
2. Straddle - Short

Strangle - Short

This is a kind of a Range Bound Options Strategy wherein a trader is expecting a range bound movement and thus short sells an OTM Call and OTM Put for maximum profits equal to the premiums received, provided the stocks remain in the range. If the stock moves out of the range, the losses are equal to the price movement away from the strike prices of the option.

Example: The below data of the month June 2013 of NIFTY

Straddle - Short

This is a kind of a Range Bound Strategy wherein a trader is again not expecting any large movement in a stock, AKA a Range Bound Movement. Unlike a Strangle Strategy, the trader trades in the same strike price for the both the Call and Put.

If the trader is expecting no movement at all, he shorts the same strike price ATM Call an Put. This is a Short Straddle.

Unlike the Strangle Strategy, in this strategy the investment on the premiums is high, being it ATM options and thus the returns would be also correspondingly higher.

Example: The below data is for the month of June 2013 of NIFTY

A straddle can also be used for expected immediate movement in the stock like on any eventful day such as earnings, budget announcement, etc.

Here is an example. Assume Reliance is announcing its earnings on 19th July 2013 evening.

1. In case a trader is expecting a neutral result or a no big surprises from the earnings, he may employ Short Straddle strategy as below
2. On 19th July 2013 Short RELIANCE - 920PE @ Rs 15.00 & 900CE @ Rs 20 = Total Premium received = Rs 35
3. On 20th July Next trading day after Results of RELIANCE were announced prices of options were
   920PE @ Rs 12 & 920CE @ Rs 5
4. Total Returns would be (20+15) – (12+5) = Rs 18 è Rs 18*250(Lot size) = Rs 4500

In conclusion, when a trader is expecting markets to be range bound, he can take advantage of the above two laid out examples to earn a profit from this unique situation.