Long and Short Option Strangle
Stock trading is nevertheless one of the most profitable markets today. This is no doubt because investors, even beginners, can make money out of it. But of course, knowledge of how the market works is the key to succeed in this market. Profitable traders employ powerful strategies like option strangle. Almost always, the simplest strategy is the most effective. One of the most effective strategy is the option strangle. There are two types of strangle strategies - the long strangle or also known as the buy strangle and the short strangle. Depending on whether you buy or sell options should you use these option strangle strategies.
Long option strangle is a neutral strategy in options trading. It involves simultaneous buying of a slightly out-of-the-money put or call of the same underlying stock and expiration date. Long Options Strangle has unlimited profit. This means that it has limited risk strategy which is taken once the option trader thinks that the underlying stock has significant volatility in the near term. Long option strangle strategies are debit spreads because net debit is taken to the enter the trade. When it comes to long gains, long option strangle strategy is viable especially if the underlying stock price makes a very strong move either upwards or downwards at expiration.
When it comes to risk, long option strangle can hit maximum loss when the underlying stock price on expiration date is trading between the strikes prices of the options that are bought. In this case, both options expire valueless and the trader losses the whole initial debit taken when entering the trade. In short option strangle, the trader either write or sell a Call and Put Option. This means that the trader is short on the options. Here, both the Call and Put have the same expiry date and lies on the same stock or index. Short option strangle is basically the option strategy wherein you sell Call and Put instead of buying them.
Short option strangle works effectively at stable markets where equities are fairly priced. For a trader, it is a big no-no to enter a position in short strangle just before announcement of the quarterly results or the key financial data. In short option strangle, the loss that can happen is unlimited. Therefore, it is recommended to buy two deep out of the money Call and Put so as to limit your losses. Short option strangle is a limited profit yet has unlimited risk. It is a credit spread because the net credit is taken to enter the trade.
Maximum profit for the short option strangle happens when the underlying stock price on expiration date is trading between the strike prices and sold options. At this price, the option strangle doesn't have a value and the options trader must keep the whole initial credit as profit. Huge losses in short option strangle can only occur when the underlying stock price makes a powerful move either upwards or downwards at expiration of the option contract.
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