The long strangle is a very popular strategy in the world of options trading. It helps a trader in earning great profits from big price fluctuations in both directions. This is great for those who want to deal with the ups and downs of financial markets.
In a long strangle strategy a trader buys both call and put option. These options are out-of-the-money, but they expire on the same day. It lets traders make money from big price swings, without guessing the market’s direction.
Highlights
- The long strangle is a market-neutral options strategy that allows traders to benefit from significant price fluctuations in either direction.
- This is the strategy of buying both a call and put option for the same underlying asset, with different strike prices but the exact same expiration date.
- The long strangle has the potential for good gains, but also carries risks that must be carefully managed.
- Optimal market conditions for the long strangle include periods of high volatility and uncertainty, where significant price swings are predicted.
- To implement the long strangle strategy, it is essential to manage risk and ensure good position sizing.
Table of Contents
- Long Strangle Strategy Meaning
- Benefits and Advantages of Trading Long Strangle
- Exit Strategies and Profit Taking For Long Strangle
- FAQ
- What is a long strangle options strategy?
- What are the essential components of a long strangle?
- What is the risk and reward profile of a long strangle?
- What are the advantages of trading a long strangle?
- What are the optimal market conditions to use a long strangle?
- How can traders manage the risks of a long strangle?
- What are some exit criteria for a long strangle?
Long Strangle Strategy Meaning
The long strangle is a trading strategy which allows traders to get profits from large market moves in any direction either up or down. It includes buying an out-of-the-money call option and an out-of-the-money put option of the same underlying asset. Both options have the same expiry date.
Key element of a Long Strangle
To use a long strangle, you need to understand on a few key things:
- Choose an out-of-the-money call option and an out-of-the-money put option with the same expiry date.
- The strike prices of both the call and put options should be situated at equal levels with the market price of the underlying asset.
- The options premium paid for the call and put options represents the maximum risk for the trader.
Strike Prices & Expiration Dates In Long Strangle
Choosing the right strike price and expiry date is crucial in a long strangle. To decrease the premium cost traders mostly pick strike prices far from the current price (OTM).
Risk and Reward Profile.
| Scenario | Outcome |
| Underlying asset price moves significantly above the call option strike price | The call option becomes in-the-money, generating profits. The put option expires worthless. |
| Underlying asset price moves significantly below the put option strike price | The put option becomes in-the-money, generating profits. The call option expires at no value. |
| Underlying asset price remains in between the call and put option strike prices | Both options expire worthless, and can give a loss equal to the total options premium paid. |
The long strangle strategy has limited risk, with the maximum loss of total options premium paid. The potential profit is unlimited, as the asset can move significantly in any direction.
Benefits and Advantages of Trading Long Strangle
The long strangle options strategy is popular in the stock market. It uses volatility to offer directional flexibility. This means traders can profit from both rising and falling markets.
This strategy has a key advantage: limited risk exposure. It gives a clear risk point. It is great for traders who want to control their risk and avoid big loss.
The long strangle has the chance of big profit potential when the market is volatile. Traders can make a lot of money if they predict the market movement correctly. This leverage helps them to increase their profits while keeping risk in check.
A long strangle is very useful for managing market fluctuations when it is too volatile. In the uncertain markets, its adaptability is highly valued due to its ability to cope with changes.
| Benefit | Description |
| Directional Flexibility | Long strangle strategy allows traders to profit from both bearish and upside market movements. |
| Limited Risk | It has less downside risks due to its defined risk. |
| Leverage | The long strangle has greater leverage. It can reduce trader’s margin in trade |
| Profit Potential | When there is a big price movement, either upside or downside, the long strangle strategy can give great profits or returns. |
The long strangle strategy allows traders to profit from market volatility, providing directional flexibility and limited risk exposure, which can be particularly beneficial for a trader.
Key Role of Long Strangle in Your Trading
Understanding the long strangle options strategy is key. It includes knowing the market, how much to trade, and manage risks. It can help you make good money from markets upmove and downmove.
Market Conditions for Good Entry
The long strangle works best when markets are very volatile. It means the price of the asset is likely to change a lot. You can see in different options trading platforms like high implied volatility times, which often lead to big price changes.
Position Sizing and Risk Management In Long Strangle
In long strangle, it is important to manage your positions right and handle the risks. One can use a part of your trading money for this strategy. Remember, the value of your options can decrease over time due to time decay (Theta). You can use stop-loss orders to control losses and you can do rolling options to keep your trade going.
Exit Strategies and Profit Taking For Long Strangle
The long strangle requires an exit strategy. You Use the options trading platform to monitor changes in price and then exit your trades when your desired criteria meets. This can result in good profits. Also, book profits at crucial moments to save your profits and minimize market uncertainty risk.
Practical Example
Let us say the cash market price of a stock is 6100. 6200 strike call is available at 145 and 6000 put is trading at a premium of 140. Both these options are out-of-the-money.
If a trader goes long on both these options, then his maximum cost would be equal to
the sum of the premiums of both these options. This would also be his maximum loss in
worst case situation.
However, if market starts moving in either direction, his loss would
remain the same for some time and then reduce.
And, beyond a point (BEP) in either direction, he would make money. Let us see this with various price points.
Scenario 1:
If spot price falls to 5700 on maturity, his long put would make profits while his long call
option would expire worthless.
Long Call: – 145
Long Put: -140 – 5700 + 6000 = 160
Net Position: 160 – 145 = 15
As price continues to go south, long put position will become more and more profitable
and long call’s loss would be limited to the premium paid.
Scenario 2:
In case stock price goes to 6800 at expiry, long call would become profitable and long
put would expire worthless.
Long Call: -145 – 6200 + 6800 = 455
Long Put: -140
Net Position: 455 – 140 = 315
The pay off chart for long strangle is shown below:
| Option | Call | Put |
| Long/Short | Long | Long |
| Strike | 6200 | 6000 |
| Premium | 145 | 140 |
| Spot | 6100 | 6100 |
| CMP | Long Call | Long Put | Net Flow |
| 5100 | -145 | 760 | 615 |
| 5200 | -145 | 660 | 515 |
| 5300 | -145 | 560 | 415 |
| 5400 | -145 | 460 | 315 |
| 5500 | -145 | 360 | 215 |
| 5600 | -145 | 260 | 115 |
| 5700 | -145 | 160 | 15 |
| 5800 | -145 | 60 | -85 |
| 5900 | -145 | -40 | -185 |
| 6000 | -145 | -140 | -285 |
| 6100 | -145 | -140 | -285 |
| 6200 | -145 | -140 | -285 |
| 6300 | -45 | -140 | -185 |
| 6400 | 55 | -140 | -85 |
| 6500 | 155 | -140 | 15 |
| 6600 | 255 | -140 | 115 |
| 6700 | 355 | -140 | 215 |
| 6800 | 455 | -140 | 315 |
| 6900 | 555 | -140 | 415 |
| 7000 | 655 | -140 | 515 |
| 7100 | 755 | -140 | 615 |
In this position, maximum profit for the trader would be unlimited in both the directions
– up or down and maximum loss would be limited to Rs. 285, which would occur if
underlying expires at any price between 6000 and 6200. Position would have two BEPs
at 5715 and 6485. Until underlying crosses either of these prices, trader would always
incur loss.
FAQ
What is a long strangle options strategy?
A long strangle is a trading strategy. It involves buying a call option and a put option on the same asset. Both options have the same expiration date but are out-of-the-money.
What are the essential components of a long strangle?
Long strangle includes both a call option and put option. These options are out-of-the-money. Regardless of the direction, the objective is to gain from significant price fluctuations.
What is the risk and reward profile of a long strangle?
The risk of a long strangle is limited to the cost of the options. The potential profit is unlimited. It works best when the asset’s price moves a lot.
What are the advantages of trading a long strangle?
Trading a long strangle comes with several benefits. It can profit from market volatility. It works in both rising and falling markets. The risk is limited, and it offers the chance for big returns.
What are the optimal market conditions to use a long strangle?
The best time for a long strangle is when volatility is low. This makes options cheaper. Look for a big price move soon. Market sentiment and economic factors also matter.
How can traders manage the risks of a long strangle?
Managing risk in a long strangle is key. Use proper position sizing and set stop-loss orders. Keep an eye on the trade’s delta and theta. Be aware of how changes in volatility affect options prices.
What are some exit criteria for a long strangle?
Managing risk in a long strangle is key. Use proper position sizing and set stop-loss orders. Keep an eye on the trade’s delta and theta. Be aware of how changes in volatility affect options prices.
