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Options Strategies
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Long Strangle
| Strategies |
Long Strangle |
| Component |
Buy lower strike price/level put, buy higher strike price/level call of the same month |
| Potential Profit |
- When the stock price/index level is below the lower break-even point, substantial and equals to lower break-even point minus stock price/index level
- When stock price/index level is above the upper break-even point, unlimited and equals to stock price/index level minus upper break-even point
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| Maximum Loss |
Total premium paid
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| Time Value Impact |
Negative |
| Break-even |
- The lower break-even point equals to lower strike price/level minus total premium paid
- The upper break-even point equals to higher strike price/level plus total premium paid
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| Remarks |
Compared with Long Straddle, Long Strangle is less expensive to establish but requires higher market volatility to be profitable. |
Example
| Component |
Buy ABC Jan $180 Put, pay $5, and buy ABC Jan $200 Call, pay $10 |
| Net Premium |
Pay $5+$10=$15 |
| Break-even |
- Lower: $180-$15=$165
- Upper: $200+$15=$215
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| Profit when |
Stock price is below $165 or above $215 |
| Potential Profit |
- When the stock price is below $165, $165 - stock price
- When the stock price is above $215, stock price - $215
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| Potential Loss |
$15 |
| Time Value Impact |
Negative |
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