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Long Strangle

The Long Strangle (also known as the Buy Strangle or Option Strangle) is a neutral strategy in which Slightly OTM Put Options and Slightly OTM Call Options with the same underlying asset and expiry date are purchased simultaneously.

This long strangle strategy might be utilized when the trader anticipates high volatility in the underlying stock in the near future. It's a method with low risk and high payoff potential. When the underlying moves significantly higher or downwards at expiration, the maximum loss is the net premium paid, whereas the maximum profit is when the underlying moves significantly upwards or downwards.

What is Long Strangle and How to Use it?

To begin, a trader must choose a stock that is anticipated to swing dramatically in the near future, either up or down. Keep in mind that while a stock nearing an earnings report may seem appealing, it is usually not a good idea. In truth, the price of the options is frequently "baked in," which means that even if the stock spikes, you are unlikely to make a significant profit.

It's now time to make a buy for an out of the money put and a call that's also out of the money. Both positions are long; keep in mind that the closer the contracts go to their expiration dates, the less valuable they become.

As the long strangle strategy works against the trader, it's ideal to buy options that have a reasonable amount of time – at least a couple of months – before expiration. This also increases the likelihood of the long strangle approach being lucrative, as the "losing" option, whatever one it is, will retain some time value even if it is way out of the money.

Components of a Long Strangle Option Strategy

Here are some of the major characteristics of the long strangle option strategy:

1) Profits and Losses from the Strategy

A major increase in the volatility of the underlying shares or a sudden shift in the share price is required for the long strangle to succeed. If the share price has moved far enough past the strike price of either option to pay the premium paid, profits will be generated near expiry. Profits can be taken early in the life of the strategy, just like with the long straddle, if the share price has moved significantly.

2) Long Strangle Time Decay

The long strangle, like the long straddle, is subject to temporal decay. Both alternatives have no cash value because they are both out of money. Time passes more quickly as expiry approaches. As a result, the strangle is usually undone well before death.

3) Volatility

The strangle is less expensive than the straddle since it is built with out-of-the-money options. The problem is that the plan will only be lucrative if the stock price rises further. For the long strangle to be considered, the investor must predict a big move. Both options will expire worthless if the projected rise in volatility or change in share price does not occur.

4) Breakeven

Two breakeven points exist:

  1. Upper breakeven point = long call option strike price + total premium paid
  2. Lower breakeven point = Long Put Option Strike Price – Total Premium Paid

5) Exit of the Long Strangle

A long strangle attempts to profit from a significant increase in stock price, implied volatility, or both. The strategy is ended by selling to close the two long options contracts if the underlying asset moves far enough before expiration or implied volatility increases. The net profit or loss on the trade is the difference between the costs of buying and selling premiums. Long strangles are typically exited before expiration because an investor wants to sell the options while they are still valuable.

Benefits of the Long Strangle

In the area of options trading, there are a variety of long strangle examples. This is because long strangle tactics come with a number of distinct advantages that set them apart from other options:

  • The risk potential of a long strangle strategy is minimal, and it only happens when the price remains between the put and call option strike prices. Furthermore, the strategy's maximum loss is limited to the net premiums paid.
  • If an investor is confident that the market will experience volatility and sharp price movements, he will benefit from a long strangle strategy. However, because the long strangle compensates for both upward and downward price swings, the investor does not need to predict the direction in which this volatility will occur.
  • Long strangle options are significantly cheaper than other options strategies. This is due to the strategy's preference for out-of-the-money options, which have lower premiums than at-the-money options.
  • Long strangle options, on the other hand, have limitless profit potential. Profit can be generated and computed by deducting the strike price from the stock price; irrespective is the price of the underlying asset moves upward or downward.

When is the Long Strangle Supposed to be Used?

A Long Strangle is used in situations where you expect a lot of market volatility, such as election outcomes, budget releases, policy changes, and yearly results announcements. You can refer more questions related to Long strangle in the faqs section as well.

Long Strangle - FAQs

Q1. Is the long strangle a good strategy to use?

The long strangle is a great strategy when you believe that the underlying security would experience a larger price movement in the near future but are unsure of the direction.

Q2. What's the difference between straddles and strangles?

Both strangles and straddles options techniques that will let an investor profit from the big price changes in a company - whether the stock moves up or down. Both strategies entail purchasing the same amount of calls and put options with the same expiration date.

Q3. What is the time impact on a long strangle?

Theta, or time decay, is an enemy of the long strangle approach. The time value of long options contracts reduces every day. An investor can profit from all of the remaining extrinsic time value by selling the option if the underlying stock price moves dramatically.

Q4. What is the best time to buy a strangle?

Strangles are useful when an investor believes the stock will likely move in one direction but wants to be safe just in case.

Q5. What is the definition of hedged short strangle?

If the underlying stock price has moved outside the profit zone, hedging short strangles can specify the risk of the trade.

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