Options Strategy - Strangle

A strangle is an options strategy involves a put at a strike price Kp and a call at a strike price Kc, where Kp < S < Kc and S is the stock price.

Both put and call options are at the same expiration.A strangle is an options strategy involves a put at a strike price Kp and a call at a strike price Kc, where Kp < S < Kc and S is the stock price. Both put and call options are at the same expiration. 


Long Strangle

The long strangle is a directional neutral strategy in options trading that involve the simultaneous buying of a out-of-the-money put (OTM Put) and a out-of-the-money call (OTM Call) of the same underlying stock and expiration date.
The long strangle is an unlimited profit, defined risk strategy that is taken when the options trader thinks that the underlying stock will experience significant volatility in the near term. 
Set up
Buy 1 OTM Call
Buy 1 OTM Put
1 Options Strategy Long Strangle TableSetup long strangle using table in tastyworks
2 Options Strategy Long Strangle CurveSetup long strangle using curve in tastyworks

Outlook- Directional neutral. We are looking for scenario where IV is currently very low giving us opportunity to buy options at low price, and waiting for increasing volatility with the stock price moving explosively in either direction.
Net Position- Net Debit (DR) transaction because you have bought calls and puts.
Effect of Time Decay- Time decay is harmful to long strangle so never try to keep it into the last month to expiration because this is the time when time decay accelerates the fastest.
Time Period to Trade- Three months until expiration. Sell the position around one month before expiration if no decisive movement from the stock.
Risk Profile
Maximum Risk - Net Premium Paid
Maximum Reward  - Unlimited
Breakeven Down  - Kp - DR
Breakeven Up  - Kc + DR
3 Options Strategy Long Strangle PandL Profile
Risk profile for long strangle.
Maximum Risk - Net Premium Paid = USD0.86x100 = USD86.00
Maximum Reward  - Unlimited
Breakeven Down  - Kp - DR = USD62.00 - USD0.86 = USD61.14
Breakeven Up  - Kc + DR = USD73.00 + USD0.86 = USD73.86.
Advantages
1. Profit from a volatile stock moving in either direction.
2. Defined risk. 
3. Unlimited profit potential if the stock moves
Disadvantages
1. Require significant movement of the stock and options prices to make profit.


Short Strangle

The short strangle is a directional neutral strategy in options trading that involve the simultaneous selling of a out-of-the-money put (OTM Put) and a out-of-the-money call (OTM Call) of the same underlying stock and expiration date.
The short strangle is an limited profit, undefined risk strategy that is taken when the options trader thinks that the underlying stock will experience no significant volatility in the near term. 
Set up
Sell 1 OTM Call
Sell 1 OTM Put
4 Options Strategy Short Strangle Table
Setup short strangle using table in tastyworks
5 Options Strategy Short Strangle CurveSetup short strangle using curve in tastyworks
Outlook- Directional neutral. We are looking for scenario where IV is currently very high giving us opportunity to sell options at high price, and waiting for future decreasing volatility with the stock price to remain range bound or not moving significantly in either direction.
Net Position- Net Credit (CR) transaction because you have sold calls and puts. The higher the IV, the wider our strangle can be while still collecting similar credit to a strangle with closer strikes that is sold in a lower IV environment.
Effect of Time Decay- Time decay is helpful to short strangle but because of the short positions, we are exposed to undefined risk so don't hold the position until expiration.
Time Period to Trade- Sell to open the position 45 days until expiration. Buy to close the position around 20 days before expiration.
Risk Profile
Maximum Risk - Undefined
Maximum Reward  - Net credit received
Breakeven Down  - Kp - CR
Breakeven Up  -  Kc + CR
6 Options Strategy Shaort Strangle PandL ProfileMaximum Risk - Undefined
Maximum Reward  - Net credit received = USD0.61 x 100 = USD61.00
Breakeven Down - Kp - CR = USD63.50 - USD0.61 = USD62.89
Breakeven Up  -  Kc + CR = USD71.00 + USD0.61 = 71.61
Advantages
1. Profit from a range bound stock price
2. Profit from IV compression.
Disadvantages
1. Undefined risk if stock moves in either direction. 
2. Defined reward
3. High risk strategy

Comments  

#2 Small Potato 2019-02-09 02:45
Hello Bentley,
There are only two strike prices for strangle, one for call, one for put. Both TOS and TT are the same on strangle.
For non earnings play, I use 16 delta strangle. Now I am trying to move to 10 delta,
For earnings play, I base on previous price gaps observed from last 3 to 4 earnings.
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#1 Bentley 2019-02-08 07:17
Hi there,
I noted there's 3 strike when u did the MU & NKE strangle, but here on tasty platform, there's only 2 strike, can u show how to construct those strangle on TOS platform and also the risk graph for those. I think the 3rd strike is for protection but I cannot produce altogether in 1 order fashion like u did... Also like 2 know how u select the strike..
Thanks :)
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