Volatile markets are when an option trader expects large swings in the market or a large sizeable move but the direction of the move isn’t certain. So, the trader is expecting a sizeable move in a particular direction, whichever it may be, either up or down.

Strategies suitable for the above hypothesis are enlisted and explained ahead.

This strategy entails buying two options of same strike prices and same maturity. A long straddle position is created by buying a call and a put option of same strike and same expiry. So, the trader pays for option premium for the purchase of both the options, i.e. call and put and expects a proportionately large movement in the underlying, so as to make money off the option strategy.

As both the types of options are bought, the time value decay of the two options, hits the strategy negatively and a jump or increase in volatility would benefit the long straddle.

Consider a buy straddle where BankNifty Futures Fair value is quoting at 39,380, trader shall

Buy 39400 8 Sep 2022 CE at 442

Buy 39400 8 Sep 2022 PE at 469.85

It’s a net debit strategy with premium outflow of about Rs 22,796, as also indicated in the tool of Quantsapp, i.e. sum of the two option premia, which are bought. The expiry payoff is indicated in orange colour. Expiry BEP1 of the strategy is at 38,488 and Expiry BEP2 of the strategy is at 40,312.

The entire option premium paid for the two legs would be lost, if BANKNIFTY expires at the same level of about 39,380. The maximum profit is unlimited on either side above the expiry BEP1 and expiry BEP2.

Similar to the straddle, the hypothesis here is that the market will move substantially in either direction. In straddle, both options have same strike price, however, in case of a long strangle, the strikes are different. Also, both the options (call and put) in this case are out-of-the-money and hence the premium paid is low. This is a strategy for traders upholding a similar view but is less risky than straddle in terms of total option premium outlay.

If a trader goes long on both these options, then his maximum cost would be equal to the sum of the premiums of both these options. The maximum loss equals this total option premium.

Consider a buy strangle where BankNifty Futures Fair value is quoting at 39,380, trader shall

Buy 39500 8 Sep 2022 CE at 391.05

Buy 39300 8 Sep 2022 PE at 407

It’s a net debit strategy with premium outflow of about Rs 19,951, as also indicated in the tool of Quantsapp, i.e. sum of the two option premia, which are bought. The expiry payoff is indicated in orange colour. Expiry BEP1 of the strategy is at 38,502 and Expiry BEP2 of the strategy is at 40,298.

The entire option premium paid for the two legs would be lost, if BANKNIFTY expires between 39,300 and 39,500. The maximum profit is unlimited on either side above the expiry BEP1 and expiry BEP2. So a move of about 798.05 points in BankNifty is required for the strategy to breakeven.

Long Guts like Strangle is a volatility strategy that aims to make money either ways from a stock/index soaring up or plummeting down. Market Outlook is Directional Neutral in Guts. You are looking forward for increasing volatility with stock price moving explosively in either direction. Buy 1 lot ITM Call and Buy 1 lot ITM Put with same expiration. Expiry is at distance away to avoid exponential time decay that happens as expiration approaches.

Maximum Profit is unlimited beyond Lower BEP (Put Strike minus total premium) or Higher BEP (Call Strike plus total premium). It is Net debit Strategy as you have bought both Call & Put. Maximum Loss is limited to total premium paid.

Time decay is harmful to Guts, as it decays exponentially in last week of expiry. It’s expensive to build Guts as both options are ITM.

The Strip is high volatility strategy with a downside bias. Strip is neutral to bearish Strategy; Ideal for traders who are anticipating an increase in volatility with the stock price moving explosively in either direction, preferably on the downside.

It involves the purchase of 1 lot ATM call and 2 lots of ATM puts with same expiry. The strategy is expensive as compared to a straddle, as there is a purchase of 3 legs of options and the expectation is of an explosive move on the downside.

The maximum Profit is unlimited. However, the profit is more skewed on downside as double the number of puts are bought. Profitability improves at double the speed on downside. The BEP on the upside is the strike plus the net debit, which is more than the Straddle because we have bought double the amount of puts. It is Net debit Strategy as you have bought both Call & Put. Strip is more expensive than usual Straddle because of the extra Put within the strategy.

Time decay is harmful to Strip. Time decay accelerates exponentially in last week of expiry.

Consider a buy Strip where Nifty Futures Fair value is quoting at 17,558, trader shall

Buy 17550 8 Sep 2022 CE at 184.85

Buy 17550 8 Sep 2022 PE at 179.40 (2 lots)

It’s a net debit strategy with premium outflow of about Rs 27,183, as also indicated in the tool of Quantsapp, i.e. sum of the two put option premia and call option premium, which are bought. The expiry payoff is indicated in orange colour. Expiry BEP1 of the strategy is at 17,278 and Expiry BEP2 of the strategy is at 18,094.

The potential of unlimited profits exist, above the BEPs indicated.

The Strap is high volatility strategy with more bias towards Upside, contrary to the Strip option strategy discussed earlier. Strap is neutral to bullish Strategy. The option traders expect stock price moving explosively in either direction, preferably to the upside. It consists of a buy trade of 2 lots ATM call and 1 lot of ATM put with same expiry. This strategy is expensive compared to the straddle and it requires explosive move mostly on the upside.

Maximum Profit is unlimited. However, profit is more skewed on upside as double the number of calls are bought, as compared to puts. Profitability improves at double the speed on upside. The BEP to the downside is the strike minus the net debit, which is more than the Straddle because the option trader has bought double the amount of calls.

It is a net debit strategy as you have bought both Call & Put. Strap is more expensive than usual straddle for the extra call option it possesses. With Neutral to Bullish outlook, one can participate in either ways surge in volatility. It is an ideal strategy to trade when implied volatility is at lower end, with possible lower option prices and is expected to increase exponentially with bias on upside.

Time decay is harmful to Strap. Time decay accelerates exponentially in last week of expiry. If stock fails to give desired move, one can lose the premium, as we are buying 3 legs of options.

Exit strategy for non-directional strategies for volatile markets: As the aforementioned strategies indicate, the forecast by the option trader is to expect a large swing in prices, in either direction. So swift move, either direction is required for the strategies to make money. Time decay is harmful to the non-directional long option strategies for the obvious reasons. So, the longer Nifty or the underlying takes to take-off, more the damage done by time-decay.

The non-directional option strategies for oscillating markets is option selling which include short strangle, short straddle.

The non-directional option strategies for volatile markets include long or buy straddle and long strangle. The non-directional option strategies for oscillating markets include sell straddle or short straddle and short strangle.

The strategies involving a combination of put and call options, formulated without taking a view on the direction of the underlying, are called non-directional option strategies. There might be a view on other option characteristic like volatility or implied volatility.

When option traders are expecting markets to be volatile, then long strangle could be deployed as a trading strategy, which entails buying an OTM put and an OTM call.

When option traders expect a volatile movement, due to some event risk, then it makes sense to buy a strangle.