Strangle is a simple adjustment to the Straddle to make it a little cheaper.
of buying at-the-money options, you buy out-of-the-money calls and puts, which
creates a lower cost basis and therefore potentially higher returns. The risk
you run with a Strangle is that the break evens can be pushed further apart,
which is bad, but where the difference is not too great then the Strangle can
simply buy lower strike puts and higher strike calls with the same expiration
date so that you can profit from the stock soaring up or dropping down. As with
the Straddle, each leg of the trade has limited downside (i.e., the call or put
premium) but uncapped upside.
the same challenges apply regarding Bid/Ask Spreads and the psychology of the
actual trade. Remember that time decay hurts long options positions because
options are like wasting assets. The closer you get to expiration, the less
time value there is in the option. Time decay accelerates exponentially during
the last month before expiration, so you do not want to hold onto options into
the last month.
this capital gain strategy when you anticipate greatly increasing volatility in
the price of the stock, in either direction.
is trading at $25.37 on May 14, 2011.
August 2011 $22.50 strike put for $0.85.
August 2011 $27.50 strike call for $1.40
debit: premiums bought = $2.25
benefit is the possibility of unlimited profit from a volatile stock moving in
either direction, with capped risk, and less expensive than doing a Straddle.
risk is limited to the net debit of the puts and calls you bought. The reward
even up: higher strike plus net debit
even down: lower strike minus net debit
especially between the strike prices.
Of Time Decay
Time decay also accelerates the fastest in the last month.
not to hold in the last month as time decay accelerates then.
the stock drops significantly, sell the put to make a profit and wait for
retracement to profit from your call.
the stock rises significantly, sell the call to make a profit and wait for a
retracement to profit from the put.
close the trade out after a news event occurs when there is no movement in the
out the position by selling your puts and calls.