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The Short Index Strangle - Follow Up

Taking a Look at the Short Strangle Trade Idea

Four weeks ago today, we published a short strangle trade idea (The Short Index Strangle) which was based upon the FTSE staying within a defined trading range for a given period (Selling a 1 Lot August 2022 6700/7700 Strangle for 110p). The purpose of this trade was to take advantage of higher than usual volatility, using historical analysis of the FTSE chart to structure the trade.

Let’s break this down.

At the time of initiating the trade the FTSE Index was trading at 7300.

The image below explains the original trade details:

Short Index Strangle

FTSE Index 7300
sell FTSE August 2022 6700 Put @ 77
sell FTSE August 2022 7700 Call @ 33

Trade Summary

01/07/22

The Index is currently trading at 7300.

A short strangle is executed by selling an August 6700 Put at 77p and selling an August 2022 7700 Call at 33p.

The net credit taken to enter the trade is the maximum possible profit of 110p (£1100 on 1 Lot)*.

If you were to close this trade today, by buying back the strangle for 14p (£140), you have would have crystalised 87% of the full profit potential in just 4 weeks (£960 out of £1100).

Today:

The FTSE Index is trading at 7338, which Is a 38 point (0.5%) increase in four weeks. To have profited from this trade we needed the price of the FTSE to stay within a 1000-point range (6700-7700).

You may consider buying back the strangle today for the cost of 14p crystalising a profit of 96p (£960 on 1 Lot), this is because, closing this trade allows us to free up margin to enter a new trade as well removing the remaining risk exposure until expiry of the options (three weeks).

Alternatively, you could hold this trade for another three weeks to attain the full profit potential of 110p (£1,100). However, for this to happen the FTSE would have to remain within our defined range for another three weeks and more importantly, the opportunity cost here is using that initial margin to enter another trade within this period which would yield a return greater than 14p.

Our growing client base have profited from this trade idea, if you would like to discuss how OptionsDesk can help you or if you would like to become a client, please get in contact.

Written By

Simon Hanouka

Simon Hanouka

Desk Broker

Check Out Our Other Articles

Take a look at our other articles where we discuss the importance of Options Trading.

The Short Index Strangle

A short strangle is a market-neutral options strategy which seeks to take advantage of a drop in volatility, time

A Complete Guide to Mastering the Short Strangle

This can be classed as a neutral strategy and profits when the underlying price stays between the two strike prices

Important information: Derivative products are considerably higher risk and more complex than more conventional investments, come with a high risk of losing money rapidly due to leverage and are not, therefore, suitable for everyone. Our website offers information about trading in derivative products, but not personal advice. If you’re not sure whether trading in derivative products is right for you, you should contact an independent financial adviser. For more information, please read our Important Derivative Product Trading Notes.

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