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Strangles in a Volatile Market - Outlook

A strangle is similar to a straddle, except that the call and the put have different exercise prices. usually , both the call and the put are out-of-the-money.

To buy a strangle is to purchase a call and a put with the same expiration date, but different exercise prices.

To sell a strangle is to write a call and a put with the same expiration date, but different exercise prices.

A trader, viewing a market as volatile, should buy strangles. A strangle purchase allows the trader to profit from either a bull or bear market. Because the options are typically out-of-the-money, the market must move to a greater degree than a straddle purchase to be profitable.

The traders profit potential is unlimited. If the market is volatile, the trader can profit from an up or downward movement by exercising the appropriate option and letting the other expire worthless.

The investors potential loss is limited. should the price of the underlying remain stable, the most the trader would lose is the premium he paid for the options. Here the loss potential is also very minimal because the more the options are out of the money, the lesser the premiums.

Here the trader has two long positions and thus, two breakeven points. One for the call, which breakeven when the market price equal the high exercise price plus the premium paid, and for the put, when the market price equals the low exercise price minus the premium paid.

 

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