The Options Strangle vs Straddle - A Comparison - YouTube

the options strangle a cheaper alternative to the straddle the option

strangle relies on three important prerequisites one that the investor has

no particular opinion as to the short-term future direction of the

underlying stock or other financial instrument and two that the future

short-term direction of the underlying stock is expected to be volatile that is

it is anticipated that it will move strongly in one direction before the

options expire three that the options you are

considering purchasing are relatively cheap the first two of these three

criteria are absolutely essential for an option strangle trade to be successful

the third criteria is almost as important you purchase an equal number

of call and put options usually with an expiration date of at least three months

out you want to give yourself plenty of time to be right it also needs to be

carefully analyzed before execution because if your positions are too

expensive due to inflated implied volatility in the option prices you

don't stand much chance of making a profit unless the price movement in the

underlying is very large the feature that distinguishes the options triangle

from the straddle is that unlike the straddle where Colin put options are

purchased at the money a strangle position is defined by all purchased

options being out of the money this is why a strangle is usually somewhat

cheaper than the straddle out of the money options have no intrinsic value

only time value purchasing longer-dated out of the money options will have more

time value than near month options and therefore be more expensive but the

reduced risk from slower time decay is worth it let's illustrate an option

strangle with a practical example our stock is currently trading at $35

and we believe that within the current or next month all the signs point to a

large move of at least $5 in either direction so here's what we do buy 10

call option contracts with an exercise price of $37.50 bite and put option

contracts with an exercise price of $32.50

both these strike or exercise prices are 2 dollars and 50 cents out of the money

within a month the stock price Falls to $30 the put options are now 2 dollars

and 50 cents in the money plus their remaining time value so they have become

quite valuable so much so that their current value is worth more than the

combined cost of the original out-of-the-money : put options and then

some for the technically-minded this is due to the increasing Delta as

the options on one side of the trade become deeper in the money Plus

increased implied volatility so you close out both the positions for

a nice profit if some really bad news came out and the

share price plummeted to $20 you would make even more profit from the put

options theoretically on the call option side your potential profits are

unlimited on the put option side the most a stock price can fall to is zero

so that places some limit on potential profits but if the fall is from $35

that's still a huge profit the final but no less important issue to consider when

deciding on an option strangles strategy is the implied volatility in the price

of the out of the money options at the time you place the trade you need to

compare the implied volatility and the options with the historical volatility

of the underlying stock and ensure that the implied volatility expressed as a

percentage is less than or equal to the historical volatility of the stock in

other words make sure the options are not overpriced often in periods when a

stock's price volatility is low before a price break out the option prices will

also become quite cheap this is an ideal opportunity for a strangle trade once

the underlying stock price becomes more volatile the options prices will also

reflect that volatility and increase in price at a greater rate than if you had

bought them after the price breakout checklist for finding options strangle

candidates here is a summary of the conditions you should expect to identify

before you consider placing a strangle trade

one earnings reports assuming the absence of other news events options

implied volatility should be lower in between company earnings reports if

you're scanning the market for strangle trade opportunities you should begin

your search by looking at stocks with upcoming earnings reports during the

next 49 to look at stock charts of the underlying financial instrument when

looking at the price chart you should be able to observe price consolidation

comparing the size of the current daily bars with those in the past it should be

apparent that these bars are smaller than the historical ones you want

something that has had big moves in the past which indicates that this stocks

price does move but now the price action is comparatively quiet due to smaller

daily price moves in consolidation mode stunts also tend to have lower daily

trading volumes under these conditions the options will normally be cheaper you

will often find this phenomenon close to the end point of a triangle or wedge

chart pattern in your stock charts 3 the options must be cheap the implied

volatility and the option prices must be less than the historical volatility of

the underlying security if your broker gives you a price chart with volatility

View mode then you can easily compare options implied volatility with the

stock historical volatility if all the above conditions are in place then you

have an ideal setup for an option strangle trade

thank you for watching if you found this helpful please like and subscribe to

receive more great option trading strategies. Options strangle vs straddle.