A strangle is a strategy where an investor buys both a call and a put option. ... For the investor to recover the premium paid for both options and break even, the price of the stock needs to move beyond the upper or lower strike prices by an amount equal to the total premium paid for the options.
A strangle is an options strategy in which the investor holds a position in both a call and a put option with different strike prices, but with the same expiration date and underlying asset. ... However, it is profitable mainly if the asset does swing sharply in price.
A long strangle is established for a net debit (or net cost) and profits if the underlying stock rises above the upper break-even point or falls below the lower break-even point.
Option Selling Strategies
Selling Options is by far the most profitable strategy in the long term, with the lowest risk.
The riskiest of all option strategies is selling call options against a stock that you do not own. This transaction is referred to as selling uncovered calls or writing naked calls. The only benefit you can gain from this strategy is the amount of the premium you receive from the sale.
A short strangle consists of one short call with a higher strike price and one short put with a lower strike. Both options have the same underlying stock and the same expiration date, but they have different strike prices.
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Example of short strangle.
| Sell 1 XYZ 105 call at | 1.50 |
|---|---|
| Net credit = | 2.80 |
Another approach to options is the strangle position. While a straddle has no directional bias, a strangle is used when the investor believes the stock has a better chance of moving in a certain direction, but would still like to be protected in the case of a negative move.
A long strangle gives you the right to sell the stock at strike price A and the right to buy the stock at strike price B. The goal is to profit if the stock makes a move in either direction. However, buying both a call and a put increases the cost of your position, especially for a volatile stock.
The Short Strangle (or Sell Strangle) is a neutral strategy wherein a Slightly OTM Call and a Slightly OTM Put Options are sold simultaneously of same underlying asset and expiry date. This strategy can be used when the trader expects that the underlying stock will experience a very little volatility in the near term.
They offer unlimited profit potential but with limited risk of loss. The more volatile the stock or index (the larger the expected price swing), the greater the probability the stock will make a strong move. Higher volatility may also increase the total cost of a long straddle position.
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