Understand What a Strangle in Options Is

What is a Strangle Options Strategy?

A strangle is a type of options strategy that involves purchasing a put and call option with different strike prices, on the same underlying asset and with the same expiry date. The strategy is referred to as a strangle because of both options “strangle” the market, creating a wide range of potential profits and losses.

Strategies for Strangle Options

The strangle options strategy can be employed in both bullish and bearish markets. In strong bullish markets, the straddle allows traders to take advantage of a potentially profitable situation with a limited risk. Conversely, in bearish markets, the trader can generate profits as long as the underlying remains relatively flat and the price doesn’t suddenly spike up or down.

Overview of Strangle Option Trading

The strangle option strategy is typically used by more experienced traders, as the strategy carries a higher degree of risk. As with any type of trading, it is important to have a clear understanding of the option’s terms, including the strike price and time to expiration, which may dictate when the option can be exercised. It is also important to understand the difference between a put and a call option. A put option gives the buyer the right to sell the underlying at a predetermined price on or before the expiration date, while a call option gives the buyer the right to buy the underlying at a predetermined price on or before the expiration date.

Advantages of Strangle Option Strategies

The main objective of a strangle option strategy is to benefit from large price movements that occur in either direction. This type of option strategy allows traders to benefit from increases and decreases in the underlying asset’s price without having to predict the direction of the move.

Strangle option strategies also have the benefit of having low premiums. Since the options purchased in a strangle strategy typically have lower strike prices and therefore lower premiums, the option trader has more leverage when trading.

Risk Management with Strangles

It’s important for option traders to use risk management techniques when employing strangle strategies. A common risk management method used by traders is to close out one of the options as soon as a profit is realized or to place protective stops. Also, it’s important to be aware of the time-value decay of the options and adjust the strategy as this occurs.

How to Design a Strangle Trade

When designing a strangle trade, traders typically purchase call and put options with different strike prices. For example, a trader may purchase a call option with a strike price of $50 and a put option with a strike price of $40. With this type of trade, the maximum profit occurs if the underlying asset is at a price between $40 and $50 at expiration. It is important to be aware of the minimum and maximum prices at which the trade can be profitable.

Steps of Setting Up a Strangle

Step 1: Identify the underlying asset and determine the strike prices for the options.

Step 2: Choose the option expiry date and potential payoff scenario.

Step 3: Evaluate the potential risk and rewards of the trade.

Step 4: Place an order for the option, depending on the chosen strategy.

Step 5: Execute the trade and monitor the price of the underlying asset.

Step 6: Close out the trade or adjust it if necessary.

When to Use a Strangle Option

Strangle option strategies are typically used when the market is volatile and traders expect large price movements in either direction. The strategy is also useful when the trader has a neutral view of the market and anticipates that the underlying asset will remain in a range over a certain period of time.

Pros and Cons of Strangle Options

The main advantages of a strangle option strategy include the ability to benefit from large price movements, lower premiums, and the leverage created by low strike prices. The disadvantages, however, include the higher degree of risk and the potential for losses to exceed the initial investment. It is also important to consider the cost of premiums and potential time-value decay when entering a strangle trade.

Profit Potential of Strangle Options

The profit potential of strangle options can be significant if the underlying asset moves markedly in either direction. As long as the underlying price lies between the two strike prices at the time of expiration, there is great potential for profit. Additionally, when the underlying asset moves drastically in either direction, the trader can benefit from the leverage

Here are some templates that you can use to create your own models

Long Strangle Option Strategy
Calendar Strangle
Strap Strangle
Strip Strangle
Calendar Straddle
Short Albatross Spread

Search for all Templates here: https://marketxls.com/templates/

Relevant blogs that you can read to learn more about the topic

Strap Strangle Options Strategy (Using MarketXLS Template)
Strip Strangle Options Strategy (Using MarketXLS Template)
Exploring the Risk/Reward of Strangle Options Trading
Short Guts Options Strategy
Earnings Announcement- It’S Impact On Implied Volatility