Option Trading Strategies

Option Strangle is a strategy where the investor holds a position in both a call and put with different strike prices but the same maturity and underlying asset. Option Strangle is profitable if there are large movements in the price of the underlying asset. If you think that there will be a large price movement in the future but unsure of which way that price movement will be Option Strangle is a good strategy. Option Strangle is similar in purpose to the options Straddle. Both are betting on volatility of the underlying stock to generate income.

Option Strangle requires substantial volatility of the stock either upward or downward. If the stock goes up, the call option increases in value and if it goes down, the put increases in value. Option Strangle like straddle also involves buying both a call and a put option. However, while the straddle uses the same strike price for the call and the put, Option Strangle uses different strikes. The maximum risk for Option Strangle is limited to the premium of the call and put together.

Creating an Option Strangle is not as complicated as it sounds in fact the beauty of Option Strangle is that usually, you only have to hold it for a few days for it to work. You just have to find a stock that has an upcoming event that you feel will move the stock significantly. Then buy an out of the money call on the underlying stock that has 6-8 weeks left until expiration and an out of the money put on the underlying stock that has  also 6-8 weeks left until expiration. Hold the trade until after the announcement never more than a few days after the announcement as the fastest that the options begin to lose their time value is 4-5 weeks before expiration. Lastly, in creating Option Strangle make sure that the options that are purchasing are not extremely overpriced because if they are it will be difficult to make money on the trade.

One of the major advantages of Option Strangle is that investors can profit if the stock moves in either direction. The potential profits on the upside are also unlimited with Option Strangle as the profits on the downside are considerable and with Option Strangle no stock is actually owned, both the call and the put are uncovered positions. However, with Option Strangle, if the stock expires between the two option strike prices, the maximum loss will be incurred by an investor. Another disadvantage with Option Strangle is when the stock rises above the call strike price but is below the upper break even point one will still incur a loss. Likewise, if the stock falls below the put strike price but remains above the lower break even point one will incur a loss as well.