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Strangle Option Strategy

Strangle Option Strategy

What is Strangle Option Strategy?

  • Long Strangle like long Straddle is a Volatility Strategy that aims to make money either ways from a stock/index soaring up or plummeting down. Long Strangle strategy demands underlying to move significantly up i.e., this is non direction but volatility-based strategy. In other words, if the underlying fails to show a significant move trader will lose value in this as the option will expire worthless.

When to Execute?

  • Long Strangle is a non-directional strategy, but trade must also be bullish on volatility. It is advised that Long Strangle should be implemented when there is a major event in near term, and volatility is on the lower and expected to increase or can be implemented on high volatile underlying. Expiry should not be nearest as there will time decay that happens highest in near term expiry.

What is the Trade?

  • Under Long Strangle we buy a lot of Out-of-Money (OTM) Call and Put for the same expiration; distance should be equal between the strike price from the ATM.

What is the Trade?

  • Under Long Strangle we buy a lot of Out-of-Money (OTM) Call and Put for the same expiration; distance should be equal between the strike price from the ATM.

Break-Even Point

  • Long Strangle will have 2 break-even points. The breakeven points can be calculated as given below. Lower Breakeven = PE - Net Premium Paid. Upper Breakeven = CE - Net Premium Paid

What will be maximum profit?

  • Maximum Profit is undefined if market shows significant move above or below the strike sold.

What will be your maximum loss?

  • It is a Net debit strategy as we have bought both Call & Put. Maximum Loss is defined as limited to premium paid.

What are the advantages?

  • Being Directional Neutral, you can participate in either way volatility jumps. Ideal to trade Strangle for stocks where earnings are due to be announced. On Indices where any major macro-economic data is due.

What are the disadvantages?

  • Time decay is harmful to Strangle. Time day accelerates exponentially in the last week of expiry. The cost to establish Strangle is significantly high. If stock fails to give desired move, one can lose the premium.

Example of Long Strangle:

  • Nifty future price is 15500. Long Strangle can be devised by buying one lot of 15200 PE @ 160.00 and one lot of 15800 CE at Rs. 140.00.Net Premium Paid = Rs.300. Undefined profit potential if stock moves above or below the upper or lower breakeven i.e., 15720 and 15280. Max loss (i.e., equal to premium) if underlying closes between 15200—15800.