An Option Trading Strategy

An Option Trading Strategy : Short Strangle on Escorts Limted

Prof. Sangram Keshari Jena

Specialization: Finance & Economics

Based on the technical analysis presented through Figure 1, Escort has already been peaked out. The Relative Strength Index (top panel) shows returning from the the upper level of 70. The moving average indicators depict a peculiar range bound scenario which is evident from the unwinding of long postion through Figure 2. Open interest is down by 2.39% during the trading as on 18th August 2022. The bollinger band in the lower panel depicts resistance at the upper level for the Escort.

Figure 1 Source :  

Figure 2: Source: Motilal Oswal                                                                                        Figure 3: Data:

Overall, the data shows a range bound market for Escort for the coming 9 days to expire of the August options contract. The Figure 3 shows the distribution of August open interest across strike prices. It shows that the concentration of open interest is highest in 1840 and 1700 strike prices for call and put respectively. Thus, Escort will face resistance at the upper level of 1840 and get support at the lower level of 1700. Therefore, it is expected that Escort will expire in the next 9 days from the August contract (i.e., date of Expiry is 25th August 2022) and will trade in the broader range of 1700-1840.
Therefore, short strangle strategy can be initiated to make money from the range bound market. Thus, it is suggested that short strangle strategy in August options contract in Escort where both 1700 put and 1840 call options are sold at the prevailing price (as of 11.20am, 18th August 2022) of INR 6 and INR 24 respectively. The lot size is 550. The gross and net payoff as on date of expiry i.e., 25th August are as follows. 
ESCORT Strike Price Premium
Sell CALL 1840 6
Sell PUT 1700 24
Premium income per unit   30
Lot Size   550
Total Premium Income   16500
Lower Break-even   1670
Upper Break-even   1870
 Total income of 16500 can be earned if Escorts trades in a broader range of 1670-1870 which is very likely to happen. The margin requirement is INR 300000. Thus, the total expected return in 9 days would be 5.5%.