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Visually Analyze Option Strategies
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The Strangle is a simple adjustment to the Straddle to make it a little cheaper.


Instead 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 be fantastic.


You 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.


Again, 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.


Market Opinion


Direction neutral.












When To Use


Use this capital gain strategy when you anticipate greatly increasing volatility in the price of the stock, in either direction.




XXXX is trading at $25.37 on May 14, 2011.

Buy August 2011 $22.50 strike put for $0.85.

Buy August 2011 $27.50 strike call for $1.40


Net debit: premiums bought = $2.25




The 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 vs. Reward


The risk is limited to the net debit of the puts and calls you bought. The reward is unlimited.


Net Upside




Net Downside


Net debit paid.


Break Even Point


Break even up: higher strike plus net debit


Break even down: lower strike minus net debit


Effect Of Volatility


Positive, especially between the strike prices.


Effect Of Time Decay


Negative. Time decay also accelerates the fastest in the last month.


Alternatives Before Expiration


Try not to hold in the last month as time decay accelerates then.


If the stock drops significantly, sell the put to make a profit and wait for retracement to profit from your call.


If the stock rises significantly, sell the call to make a profit and wait for a retracement to profit from the put.


Always close the trade out after a news event occurs when there is no movement in the stock.


Alternatives After Expiration


Close out the position by selling your puts and calls.

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