Optin Box close
Welcome to The Options University Website

This is no ordinary ebook. Options 101 just hit the bookstore shelves all over the country. It's available at Amazon.com and BarnesandNoble.com and we've been told it's the 'best options book on the market today'.

Because we feel that a proper foundation in options is critical to your success,
We'd Like To Offer You
3 FREE Chapters
of Our NEW Book
Options 101:
From Theory to Application
by Options Expert Bill Johnson
To get your 3 FREE chapters, simply enter your name and email address below, and we'll send these to you right away
(You'll have them in your email inbox instantly!).
It’s fun for me to spend time with people that are really bright and passionate about something that I love as well. Bill Johnson has done a wonderful job of getting his message across in an easy to understand way. I hope this is the first of many…”

Tom Sosnoff
thinkorswim, inc.
Name:
E-mail Address:

Jan

10

Strangle Scenarios

Filed Under Trading Articles 

If this is your first time visiting, subscribe to our RSS feed.

The Strangle is a strategy that relies on movements in stock price or implied volatility to establish profit opportunities. The Strangle buyer looks for the stock to move aggressively in either direction or for the anticipated perception of possible aggressive moves that brings about an increase in implied volatility.

Sellers of the Strangle hope for the opposite, of course. A lack of stock movement or a perceived lack of movement causing implied volatility to decrease creates profitable scenarios for the Strangle seller.

Strangle Mechanics

Look at the July 60/65 Strangle in our illustration. We can either buy or sell the Strangle. If we purchase both the July 65 call and the July 60 put simultaneously in a one to one ratio, we have a long Strangle. We would sell both the July 65 call and July 60 put simultaneously in a one to one ratio to construct a short Strangle.

Continuing with our illustration, we will set the price for each of the options. With our imaginary stock trading at $63.50, the July 65 call trades at $2.11 and the July 60 put trades at $1.20. The combination of these two prices accounts for the $3.31 cost of the Strangle.

Fast forward to expiration and observe what happens to the value of the Strangle at different stock prices at expiration.

As you can see, the Strangle’s value increases the further the stock moves below the lower strike or above the upper strike. The closer the stock is to the area defined by the inner border between the two strikes, the lower the value of the Strangle at expiration. The chart clearly shows that the more the stock moves away from the inside of the strikes, the higher the Strangles’ value becomes.

Conversely, the closer the stock finishes to the area in between the strikes, the lower the value of the Straddle. Owners of Straddles want and need movement while sellers of Straddles want and need stagnation.

How does this example influence your investment strategy? If you feel a stock is likely to move aggressively in either direction or if you expect implied volatility to increase, possibly due to impending news (such as earnings, FDA approval, etc.), you should look into the purchase of a Strangle.

However, if you feel that a stock is likely to enter a stagnant phase or if you feel that implied volatility is likely to decrease, then the sale of a Strangle could be a very profitable trade for you.

Popularity: 99% [?]

1,296 Views | Email Post | Print This Post Print This Post

Help others find this article at:

del.icio.us Digg Furl Reddit Google Ma.gnolia Socializer Technorati Windows Live Yahoo!



Comments

Leave a Reply