A strangle is an options strategy where the investor holds a position in both a call and a put with different strike prices, but with the same expiration date. The strangle allows the investor to profit from a move in either direction. If the underlying asset moves up, the call will increase in value and offset the loss in the put. If the underlying asset moves down, the put will increase in value and offset the loss in the call. The key to this strategy is that the underlying asset must move enough in either direction to make up for the cost of the premium paid for both options.
What is a Strangle?
A strangle is an options strategy where the investor holds a position in both a call and a put with different strike prices, but with the same expiration date. The strangle allows the investor to profit from a move in either direction. If the underlying asset moves up, the call will increase in value and offset the loss in the put. If the underlying asset moves down, the put will increase in value and offset the loss in the call. The key to this strategy is that the underlying asset must move enough in either direction to make up for the cost of the premium paid for both options.
The strangle is a versatile strategy that can be used in a variety of market conditions. In a rising market, the strangle can be used to profit from a continued increase in the price of the underlying asset. In a falling market, the strangle can be used to profit from a continued decrease in the price of the underlying asset. In a sideways market, the strangle can be used to profit from a move in either direction.
Why Use a Strangle?
The strangle is a good way to profit from a big move in either direction. It is also a good way to hedge a portfolio against a big move.
The strangle is a good way to profit from a big move in either direction. It is also a good way to hedge a portfolio against a big move.
How to Set Up a Strangle
To set up a strangle, the investor buys a call with a strike price below the current price of the underlying asset, and a put with a strike price above the current price of the underlying asset. The investor then holds both options until expiration.
The advantage of a strangle is that it gives the investor the potential to profit from a big move in either direction. The downside is that the investor needs the underlying asset to move significantly in order to make a profit.
Strangles are best used when the investor is expecting a big move in the underlying asset, but is not sure which direction the move will be in.
Adjusting a Strangle
If the underlying asset moves in the investor's favor, the strangle can be adjusted to lock in profits. If the underlying asset moves against the investor, the strangle can be adjusted to minimize losses.
To adjust a strangle, the investor buys or sells options to change the strike prices of the options that make up the strangle. By doing this, the investor changes the breakeven point of the strangle.
For example, suppose an investor buys a strangle for $100. The investor buys a put with a strike price of $50 for $10 and a call with a strike price of $60 for $10. The investor's breakeven point is at $50 + $60 - $100 = $10. If the underlying asset is trading at $15 when the investor wants to adjust the strangle, the investor would buy a put with a strike price of $5 and sell a call with a strike price of $15. Now the investor's breakeven point is at $5 + $15 - $100 = -$80. The investor has moved the breakeven point from $10 to -$80.
Pros and Cons of a Strangle
The main advantage of a strangle is that it allows the investor to profit from a big move in either direction. The main disadvantage of a strangle is that it is expensive to set up and adjust.
Another advantage of a strangle is that it can be used to hedge a portfolio. A strangle can also be used to take advantage of a change in volatility.
The main disadvantage of a strangle is that it can lead to large losses if the underlying security does not move as expected. A strangle is also a complex strategy that may be difficult to understand and implement.
Conclusion
The strangle is a good way to profit from a big move in either direction. It is also a good way to hedge a portfolio against a big move.
The key to success with this strategy is to be patient and wait for a big move. It is also important to manage risk carefully, as a big move in the wrong direction can lead to losses.
If you’re looking to make money trading options, you’ve come to the right place. In Foolproof we will teach you how to trade options and after that we will alert you on what trades to take.
The first 14 days are free. Check it out Foolproofoptions.com