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You Are Here: Home > Stockmarket & Trading > Options > Option Strategies > Long Strangle
The Different Option Strategies
Long Strangle
Summary:
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
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