Learn to be a Financial Hunter - Not the Hunted




You Are Here: Home > Stockmarket & Trading > Options > Option Strategies > Long Strangle
The Different Option Strategies
Long Strangle
A Long Strangle is both a bullish and bearish trade as it will profit from explosive movement in either direction. It is even more aggressive than a long Straddle.
Long Strangle
Risk: Limited
Reward: Unlimited
The Trade: Buying out-of-the-money calls and puts

ABC Stock trading at £5.00

Buy 1 Sep £6.00 call and buy 1 Sep £4.00 put (see pay-off diagram below)

Options - Long Strangle

When to use: You believe a stock will have an explosive move either up or down. This strategy is similar to a Straddle but the premium paid is less, but a larger move is needed to show a profit.
Volatility expectation: Very bullish, increases in volatility work marvels for the position.
Profit: The profit potential is unlimited although a substantial directional movement is necessary to yield a profit.
Loss: Limited to the premium paid in establishing the position.
Breakeven: Occurs if the market rises above the higher strike price at B by an amount equal to the cost of establishing the position, or if the market falls below the lower strike price at A by the amount equal to the cost of establishing the position.
Time decay: This position is a major wasting asset. As time passes the value of position erodes. If volatility increases, erosion slows, if volatility decreases, erosion speeds up.

Trading ideas and tactics:

  • Can mix the strikes up depending on whether you lean towards the bull or bear tract but are still overall neutral - Perhaps you feel the odds slightly favour a bull move. If stock is at £5.00 instead of buying the £4.50P and £5.50C you could buy the £4.50P and £6.00 call

  • Use some sort of time stop because time erosion is your enemy, ie if the market hasn't made a big move within 2 weeks consider dumping the trade

  • If you expect a mega move then this is a better strategy than Straddles because Strangles are cheaper to buy. more can therefore be bought with the same amount of capital

  • Look to trade when the markets have been quiet for a long time and volatility is low, if this is the case look to trade the longer dated months
Free Report: How to Learn Spread Betting and Prosper
How to build the all-important trading experience
Where to get trading help and advice
Which broker to use and why
Simple 2 month training plan to follow
More details
[an error occurred while processing this directive]

© 2019 LearnMoney.co.uk All rights reserved

The information on the LearnMoney.co.uk website has been compiled from sources believed to be reliable, but is not warranted to be accurate or complete.
All recommendations and comments are provided for general interest only and should not be construed as advice.
Professional advice should always be sought before buying or investing in any financial product.
The price of securities and any income from them can go down as well as up.
Past performance of a security or market is not necessarily indicative of future trends.
Any opinions and recommendations on LearnMoney.co.uk are given in good faith, but without legal responsibility and are subject to change without notice