Word on Strangles as Neutral Strategies
Although long and short strangles differ in their response to market movement, we have chosen to list both as neutral strategies. In a pure sense, the short strangle is a neutral strategy because it achieves maximum profit in a market that moves sideways. In contrast, the long strangle benefits from market movement in either direction. However, since a $10 move in either direction will have the same impact on profit, the trader doesn't necessarily have a preference which way the market moves. In this sense, the trader is neutral about market direction--as long as movement occurs.
Long Strangles
Long strangles are comparable to long straddles in that they profit from market movement in either direction. From a cash outlay standpoint, strangles are less risky than straddles because they are usually initiated with less expensive, near-the-money rather than at-the-money options.
Like long straddles, they have unlimited profit potential on both the upside and downside. For example, let's imagine that a particular stock is trading at $65 per share. The following chart shows where the near-the-money and at-the-money options are trading.
Stock @ $65
|
Strike Price |
Calls |
Puts |
|
60 |
7 |
2.25 |
|
65 |
5.25 |
5 |
|
70 |
2.50 |
6.75 |
*Calls and puts used in strangles have the same expiration.
|
Long Strangle |
|
Buy |
1 60 Put @ $2.25 |
$225 |
|
Buy |
1 70 Call @ $2.50 |
$250 |
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