Strangle - Buy Lower Strike Put, Buy Higher Strike Call
- Adjusted strategy to Straddle, slightly cheaper
Strategies...
- Buy lower strike Puts (OTM)
- Buy Higher Strike Calls (OTM)
- Select highly volatile stock
- Strangle is cheaper than Straddle (buying OTM options in strangle, ATM options in Straddle)
- Make profit with big move in stock in either direction.
- Limited downside risk, uncapped upside potential profit.
Example...
McDonald's Corporation (NYSE:MCD) is traded at $90.20 on May, 2012. To do a Strangle, you
- Buy Sept 2012 $92.50 Call at $2.10.
- Buy Sept 2012 $87.50 Put at $3.00.
(To do a Straddle, you buy Sept $90 Call at $3.30, and Sept $90 Put at $4.20. You pay more by using Straddle strategy)
 | |||||
| Long Strangle |
 |
| Long Strangle |
- Cheaper than Straddle
- Profit from volatile stock's movement
- Uncapped potential profit
- Significant movement of stock to cover all costs.
- Time decay accelerates as options close to expiration.
Maximum Profit: Uncapped Profit
Maximum Loss: $2.10 + 3.00 = $5.10
(Call Premium + Put Premium)
Breakeven Up: $92.50 + $5.10 = $97.60
(Strike Price + Premium Paid)
Breakeven Down: $87.50 - $5.10 = $82.40
(Strike Price - Premium Paid)
No comments:
Post a Comment