Strangle Option Strategy

| February 28, 2012 | 0 Comments

StrangleA strangle position is an options position created with puts and calls.

Simply.. this position is a purchase of a call option and a purchase of a put option out-of-money around the current price on the underlying stock price.

Here’s the thing… a long strangle is profitable with either a large move in volatility or a large move in the stock price.

This sounds like a complex or exotic strategy, but it really isn’t.

If you’re looking for a large stock move, but are uncertain which way the move will be, you’ll find yourself using a strangle.

Let’s say Microsoft is trading at $25.  Their earnings announcement is coming up and you think the stock can easily move 20% in any direction.  Simply… you believe after the announcement Microsoft will trade either below $20 or above $30 per share.

You can use your conviction by buying a strangle on Microsoft.  You could buy a December $30 strike call option for $.05.  In addition, you buy a December $20 strike put option for $.08.  So, this strangle position costs you a mere $.13 a share or $13 for the position.

It’s a long shot, but if Microsoft makes the large move you were looking for, obviously one of your options will increase in price.

However… if Microsoft’s earnings announcement comes and goes without incident, you’ll most likely lose your investment.

The good news it was only $13… hopefully you could live with that, for the potential profit if you were right.

Category: Options Trading Strategies

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.