A strangle is similar to a straddle, except that the call and the put have different exercise prices. Usually, both the call and the put are out-of-the-money.
To "buy a strangle" is to purchase a call and a put with the same expiration date, but different exercise prices. Usually the call strike price is higher than the put strike price.
To "sell a strangle" is to write a call and a put with the same expiration date, but different exercise prices.
A trader, viewing a market as stable, should: write strangles.
A "strangle sale" allows the trader to profit from a stable market.
The investor's profit potential is: unlimited.
If the market remains stable, investors having out-of-the-money long put or long call positions will let their options expire worthless.
The investor's potential loss is: unlimited.
If the price of the underlying interest rises or falls instead of remaining stable as the trader anticipated, he will have to deliver on the call or the put.
The breakeven points occur when market price at expiration equals...the high exercise price plus the premium and the low exercise price minus the premium.
The trader is short two positions and thus, two breakeven points. One for the call (high exercise price plus the premiums paid), and one for the put (low exercise price minus the premiums paid).
Why would a trader choose to sell a strangle rather than a straddle?
The risk is lower with a strangle. Although the seller gives up a substantial amount of potential profit by selling a strangle rather than a straddle, he also holds less risk. Notice that the strangle requires more of a price move in both directions before it begins to lose money.
To "buy a strangle" is to purchase a call and a put with the same expiration date, but different exercise prices. Usually the call strike price is higher than the put strike price.
To "sell a strangle" is to write a call and a put with the same expiration date, but different exercise prices.
A trader, viewing a market as stable, should: write strangles.
A "strangle sale" allows the trader to profit from a stable market.
The investor's profit potential is: unlimited.
If the market remains stable, investors having out-of-the-money long put or long call positions will let their options expire worthless.
The investor's potential loss is: unlimited.
If the price of the underlying interest rises or falls instead of remaining stable as the trader anticipated, he will have to deliver on the call or the put.
The breakeven points occur when market price at expiration equals...the high exercise price plus the premium and the low exercise price minus the premium.
The trader is short two positions and thus, two breakeven points. One for the call (high exercise price plus the premiums paid), and one for the put (low exercise price minus the premiums paid).
Why would a trader choose to sell a strangle rather than a straddle?
The risk is lower with a strangle. Although the seller gives up a substantial amount of potential profit by selling a strangle rather than a straddle, he also holds less risk. Notice that the strangle requires more of a price move in both directions before it begins to lose money.
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