Long Put Vs Covered Strangle Options Trading Strategy Comparison

A long put option strategy works well when you're expecting the underlying asset to sharply decline or be volatile in near future.

A covered strangle strategy can be used when you are bullish on the market but also want to cover any downside risk. You are prepared to sell the shares on profit but are also willing to buy more shares in case the prices fall.

When you are expecting a drop in the price of the underlying and rise in the volatility.

The Strategy is perfect to apply when you're bullish on the market and expecting less volatility in the market.

• Buy Put Option

Let's assume you're Bearish on Nifty currently trading at 10,400. You expect it to fall to 10,000 level. You buy a Put option with a strike price 10,000. If the Nifty goes below 10,000, you will make a profit on exercising the option. In case the Nifty rises contrary to expectation, you will incur a maximum loss of the premium.

The covered strangle options strategy can be executed by buying 100 shares of a stock while simultaneously selling an OTM Put and Call of the same the stock and similar expiration date.

The breakeven is achieved when the strike price of the Put Option is equal to the premium paid.

There are 2 break-even points in the covered strangle strategy. One is the Upper break even point which is the sum of strike price of the Call option and premium received while the other is the lower break-even point which is the difference strike price of short Put and premium received.

The risk for this strategy is limited to the premium paid for the Put Option. Maximum loss will happen when price of underlying is greater than strike price of the Put option.

The risk on this strategy is only on the downside when the price moves below the strike price of the Put option.

This strategy has the potential to earn unlimited profit. The profit will depend on how low the price of the underlying drops.

The maximum profit on this strategy happens when the stock price is above the call price on expiry. The profit is the total of the gain from buying/selling stocks and net premium received on selling options.

Underlying goes down and Option exercised

• Maximum Profit = Unlimited
• Maximum Profit Achieved When Price of Underlying = 0
• Profit = Strike Price of Long Put - Premium Paid

You will earn the maximum profit when the price of the stock is above the Call option strike price on expiry. You will be assigned on the Call option, would be able to sell holding shares on profit while retaining the premiums received while selling the options.

Underlying goes up and Option not exercised

• Max Loss = Premium Paid + Commissions Paid
• Max Loss Occurs When Price of Underlying >= Strike Price of Long Put

The maximum loss would be when the stock price falls drastically and turns worthless. The premiums received while selling the options will compensate for some of the loss.

Unlimited profit potential with risk only limited to loss of premium.

• As the strategy involves buying shares when prices fall, there is long-term gain even if their short-term loss.
• There is no upside risk due to the long position in stocks.
• Allows you to earn income in a moderately bullish market.

You may incur 100% loss in premium if the underlying price rises.

• The substantial risk when the price moves downwards.
• Risk of assignments.