Strangle strategy

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Strategy Straddle I showed you in the last article. Let me remind you that it applies in options, and futures section about the strategies I put it on the cause of a large number of common features in futures and options. Briefly remind you that the essence of the strategy is to simultaneously buy or sell Put and Call options. And, to sell or buy depends on how volatile the market is.

Strangle strategy

Strange is something similar to straddle with only one difference: whith the same volume of Put and Call options they should differ among themselves on the terms of expiration (termination of the agreement) and the exercise price.

  • long strangle — sale of options with the expectation that in the near future the price of the asset will inevitably rise or fall;
  • short strangle — acquisition of options on the market with minimal volatility (narrow corridor).

And one more important remark: if at straddle the options is purchased “at the money” (i.e. the market price is approximately equal to the strike price, see details in previous article), the strategy Strangle buys the option “out of the money”. The advantage of strangle is its relatively low straddle cost (due to the difference in strike prices). The drawback is pushing the break-even points, that is, you need to apply a strategy only on a strong move. Profit in this strategy is unlimited (although there are strategies with upper ceiling), the maximum possible loss is the sum of the premiums for both call option.

Example: there the shares of the company “ABCD”, which as 26.10.2016 have a cost of 48 dollars. Buy a Put option with a strike price of $ 30 and expiry February 15, 2017 at a price of 2.7 USD. Also buy a Call option with a strike price of 55 dollars at the price of 3,5 dollars. Get:

  • maximum loss is — 2,7+3,5=6,2 USD;
  • lower breakeven point: 30-6,2 = 23,8 USD;
  • upper breakeven point: 55+6,2 = 61,20 USD

options trading strategy

Recommendations:

  • trade in the time of a monthly or quarterly news on liquid options. Only strong news can lead to sharp price changes;
  • notice how the price of an asset was changing over the last 6 months. If there is a strong jumping — this is a positive signal;
  • choose options with the expiry time of 2-3 months. A longer period may lead to losses of money due to the time value.

In conclusion I will add that there are a lot of strategies for the options market, but they are all built on the simultaneous buying or selling several of the opposite options. I will give a few examples:

  • strip — the purchase of one option at the money Call and 2 options at the money Put. Expiration and the exercise price are the same (“bearish” strategy);
  • strep — purchase of one option at the money Put and 2 options at the money Call. Expiration and the exercise price are the same (“bullish” strategy);
  • gats— the purchase of a Call option and the Put in money. The expiration date is the same, the execution price is different. The strategy involves expensive entrance because it is rarely used, intended for neutral market;
  • calendar strategy options — the strategy focuses on the acquisition of options with different expiry at the same strike price use the hedging strategy. For example, selling a Call option out of the money earlier of the expiration and the purchase of a Call option with a later expiry date. Used in a bull market;
  • Call ladder triple strategy. Provided for the purchase of a Call option at the money or in the money, selling Call options out of the money, sell Call options out of the money. The exercise price of the second put option must be higher than the previous. Used in neutral markets.

In practice, the strategies differ in the distances between the points of break-even and types of options (about, in or out of the money). Despite their apparent simplicity, strategies are recommended to professionals. First, it’s hard to measure the sharpness of the jump in prices, and secondly, not all brokers allow simultaneous buying of options. But options allow to reduce losses to a minimum.

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