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- What is an Option Contract?
- Long Call Option Strategy
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- Short Put Option Strategy
- Covered Call Option Strategy
- Long Straddle Option Strategy
- Collar Option Strategy
- Bull Call Spread Option Strategy
- Bull Put Spread Option Strategy
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- Bear Put Spread Option Strategy
- Long Strangle Option Strategy
- Short Strangle Option Strategy
- Calendar Spread Option Strategy
- Butterfly Spread Option Strategy
- Cash Secured Put Option Strategy
- Option Greek Theta (Time Decay)
- Option Greek Delta (Price Relationship)
- Option Greek Vega (Implied Volatility)
- Stock option learning games
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long strangle
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Long strangle stock option trading strategy
What is a strangle?
A long strangle option trading strategy is an option position that may be implemented when you think there there may be a sharp or steady rise or fall in the underlying stock price.
Strangle buying is a popular high volatality option trading strategy and should only be considered when fair consideration has been given to the proper risk management of the option position.
One of the many benefits of purchasing a long strangle option position is with regard to the fact that you can participate in large moves to the upside, as well as downside with limited capital outlay.
The long strangle option strategy may look very similar to the long straddle option position. The two strategies are practically the same. The primary difference is with regard to the strike prices. In a long straddle option position the strike prices are the same, as opposed to the long strangle option position where the put and call strike prices are different.
A great benefit of utilizing the long strangle option strategy in ones trading plan is that a trader or investor can essentially participate in large swings and high volatility moves in the underlying stock without ever having to own or assume a short stock position.
The long strangle option position also allows you to maintain neutrality. One may not know which way the stock going to go, they just know that its going somewhere soon.
When going "long"(buying) call and Put options always consider the fact that time decay has a negitive
Also keep in mind that any rise in implied volatility (IV) will have a positive impact on both the long call option and long Put option contracts. When buying a Long Strangle option position you are considered long volatility.
(Theta and Vega are very important regarding
The chart above is an illustration of the following example. Notice how the position has two break-even points--
~Buy 1 45 strike Put option contract @ $2.50 ask.
~Buy 1 55 strike Call option contract @ $2.50 ask.
~Total cost excluding commission= $500.
~Strike prices= $45.00 & $55.00
~Breakeven points at expiration=
strike price ($55.00)+
total price paid ($5.00)=
upside breakeven = $60.00
------------------------------------
strike price ($45.00)-
total price paid ($5.00)=
downside break-even= $40.00
This example illustrates holding the Long Strangle option position through the contracts expiration cycle. Remember, at expiration, all that is left in an option contract is the intrinsic value of the option contract.
As an option buyer you have the right to exit the position at any time prior to expiration. Many traders chose to take this route. Especially when there is still a lot of time premium (theta) remaining in the options price.
Also notice how your maximum loss on the trade is limited to the price paid for the Put and Call option contracts.
There will always be trade-offs to make. The Long Strangle option strategy allows much opportunity through leverage. This is a double edge sword. Through Proper risk management, knowing the reasons why you entered the trade, as well as your exit strategy, combined with the ability to make the necessary adjustments, one will be well on their way to trading the Long Strangle option strategy profitably.
