Learn about Strangle strategy in the options market3 Minutos De Lectura
Strangle is a strategy used by investors in the options market, which consists of buying (Long Strangle) or selling (Short Strangle) two options: a Put and a Call, with the same expiration date, but with a different exercise price.
Below we will explain the two main operations that can be executed.
Strangle strategy in the options market
The Long Strangle strategy is characterized by being a position where the investor has to buy a put option and another call option, with the same maturity but with a different exercise price. The strike price of the put option must be lower than that of the call option.
Market expectation: the Long Strangle strategy follows a bidirectional movement, since the market expectations are bidirectional, that is, both upward and downward.
the maximum profit in this strategy is unlimited, whatever the direction of the market. If, at the time of maturity, the market is bullish, the advantage will be obtained when the price of the underlying is higher than the sum of the exercise price of the call option plus the premiums paid for the purchase of the put and call. Otherwise, if the market is down, the advantage will be obtained when the price of the underlying is lower than the strike price of the put option minus the premiums paid for the purchase of the options.
the maximum loss an investor can sustain is limited to the premium paid for the purchase of the options. The investor will incur a loss if the price of the forward underlying is between the strike price of the put option and the strike price of the call option.
-Effect of time:
in the Long Strangle strategy, the passage of time has a negative effect, as the maturity approaches, the premium paid will lose value.
the Long Strangle strategy investor supports a limited level of risk, since he knows the maximum risk at all times.
The short Strangle strategy is built by selling a put option and selling a call option; with the same maturity, but with a different exercise price. The strike price of the put option will be lower than the strike price of the call option.
Market expectation: the investor who positions himself with the short Strangle strategy expects that there will be no movement in the market, that is, stability. In addition to stability, it is considered that the market in which it is operating has a relatively high implicit volatility.
Benefit: the maximum profit that can be obtained with this strategy is limited to the amount of the premium paid for the sale of call and put options. This profit is achieved when the price of the underlying, at maturity, is between the exercise prices of the put and call options.
Loss: The maximum losses that an investor can sustain are unlimited and occur whenever the price of the underlying is below the strike price of the put option or above the strike price of the call option. As the bid price of the underlying moves away from these points, the loss will increase. For this reason, the short strangle strategy requires constant monitoring and vigilance from opening to closing.
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