Finance

Strangle Strategy

Strangle Strategy

To make it cheaper to execute the option strangle is the slight modification of the straddle. A strangle can hold both the call and put options within the same underlying asset and the same expiration date. Strangle is cheaper than the straddle because strangle can buy or sell both the call and put option at the Out-of-the-Money Strike price. It is useful when the market moves in one direction either upside or downside. 

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 Long Strangle:

The Long Strangle is a neutral strategy that has to buy the slight OTM call option and the OTM put options under the same underlying asset and same expiry date, at a different strike price. Long Strangle is the Limited Risk and Unlimited Profit Strategy. The maximum loss is the net premium paid while the maximum profit highest movement in the underlying asset.

  •   Market view: Observe the volatility.
  •   Risk: Limited to Premium Paid both calls and put
  •   Reward:  Unlimited Profit
  •   Upward Break-even point: Call Strike Price + Net Premium Paid.
  •   Lower Break-even point:   Put Strike Price – Net Premium Paid

Strangle

Short Strangle:

 Short strangle is also known as Sell Strangle or Naked Strangle Sell. it is a neutral strategy option a slight change of the short straddle. It involves selling a slightly out-of-the-money put option and a slightly out-of-the-money call option with the same underlying asset and the same expiration date at different Strike Prices.

  • Market view: we can speculate that high probability of breakout on the upside
  • Risk: Unlimited Risk on sell-side
  • Reward:  Limited to the premium received
  • Upward Break-even point: Strike of Long call + Net premium received.
  • Lower Break-even point:   Put Strike Price – Net Premium received.

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Strap Strangle:

A Strap Strangle is also known as Strap and a long strangle which buys more call options than put option and has a Bullish view. Strap Strangle is a volatile Strategy that is useful when an underlying asset’s breakout is uncertain but it inclined to move upside. When an underlying asset breakout on the upside a strap strangles make a higher percentage in profit than the regular strangle. Strap Strangle is suitable for beginner traders to grasp the option calculations easily to gain profit. It is complicated than a regular strangle.

  • Market view: we can speculate that high probability of breakout on the upside
  • Risk: Limited to Net Premium Paid
  • Reward:  Unlimited Profit
  • Upward Break-even point: Call Strike Price + (Net premium Paid/ [No: of call options/No: of put option]
  • Lower Break-even point:   Put Strike Price – Net Premium Paid.

Strip Strangle:

A Strip Strangle is also known as Strip and a long strangle which buys more put options than call option and has a Bearish view. Stip Strangle is volatile Strategy is useful when an underlying asset breakout is uncertain but it inclined to move downside. When an underlying asset breakout on the downside a strip strangles make a higher percentage in profit than the regular strangle.             Strip Strangle is a straightforward option suitable for beginner traders to grasp the option calculations easily to gain profit and make adjustments on loss. It is complicated than a regular strangle.

  • Market view: we can speculate that high probability of breakout on the downside
  • Risk: Limited to Net Premium Paid
  • Reward:  Unlimited Profit
  • Upward Break-even point: Call Strike Price + Net premium paid
  • Lower Break-even point:   Put Strike Price – (Net Premium Paid [No: of put options/No: of call  options])

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Advantages of the strangle:

  • The market moves in any direction either upside or downside can gain profits on the current market direction.
  • Lower the net premium paid than a straddle.
  • Limited risk and unlimited profit.

 Disadvantages of the Strangle:

  • There will be brokerage charges for buying or selling both the call and put options.
  • Underlying stock or index price slightly change, below the upper break-even point and above the lower break-even point can incur the loss of premium.     

Author: John Earla

About Author: Currently pursuing Financial Risk Management from GARP(US) and completed Graduation in B.Com computers. John is interested in finance and Risk Analysis.

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