đ
Long Strangle Option Strategy - Neutral Options Strategies - Options Trading Strategies - YouTube
Channel: Option Alpha
[1]
Hey everyone.
[2]
This is Kirk, here again at optionalpha.com
and this is the video tutorial for the long
[7]
strangle option strategy.
[10]
The market outlook for this strategy looks
similar to this as far as a profit loss diagram,
[16]
but what youâre really looking for is a
major move in either direction up or down
[22]
in the underlying stock before expiration.
[25]
This is different from a straddle.
[27]
A strangle, you are moving your strikes out
further.
[31]
You're not buying the same strike price.
[34]
Youâre moving out of the money with your
strikes, so youâre looking for an even bigger
[38]
move.
[39]
If you thought you were looking for a big
move on a straddle, with a strangle, you need
[44]
an even bigger move.
[45]
Itâs going to be less cost, but a little
bit more risky in that the market really,
[51]
really has to move pretty fast.
[54]
This is a market neutral strategy specifically
designed for high volatility conditions where
[58]
stocks are swinging back and forth.
[62]
How to setup this strategy is very easy.
[65]
Think about it like purchasing two out of
the money options put together.
[69]
All youâre going to simply do is buy a call
option and buy a put option with strike prices
[76]
that are slightly out of the money, but for
the same expiration period.
[81]
Letâs say for example that our stock is
trading at 40.
[84]
Weâre going to buy strike prices that are
slightly out of the money for each.
[88]
For the call option, weâre going to buy
a strike price of 45 and for the put option,
[93]
weâre going to buy a strike price of 35.
[96]
If you donât know what out of the money,
in the money and at the money mean, check
[100]
out one of our other video tutorials.
[103]
The more bullish you are on volatility, the
further out of the money you can buy these
[107]
options.
[108]
It doesn't mean when I say that weâre going
to buy these slightly out of the money that
[111]
you canât go out and buy options even further
out at letâs say 30 and 50.
[117]
But the more bullish you are, you can buy
these further out and obviously, the better
[123]
return on your money that youâre going to
get.
[126]
With regard to risk, the maximum loss occurs
if the underlying stock remains between the
[132]
strike prices at expiration.
[136]
With our example here, the strike prices of
35 and 45, this is where our maximum risk
[142]
occurs of -$200, (and weâll go over that
example in a little bit) but if the stock
[148]
stays relatively calm or not volatile at all.
[152]
This is a strategy that profits from huge
swings in volatility, so if the stock trade
[157]
sideways, thatâs not good for our strategy.
[161]
If the stock actually trades between these
strike prices at expiration, both options
[165]
expire worthless, so all the money that you
paid to get the right to buy these options
[171]
is going to be lost completely.
[173]
The profit potential for this strategy is
unlimited.
[176]
The stock can dramatically increase, it can
dramatically fall and as long as it moves
[182]
beyond the premiums that you paid for the
overall strategy, then you make a profit at
[189]
the end of the day.
[190]
Again, your net profit is going to be your
gross profit, less the premium that you paid.
[194]
You have to factor in your cost to get into
the strategy.
[199]
If we take a look at volatility and its effect
on this strategy, we know that we want a big
[204]
increase in either direction in the stock.
[207]
An increase in implied volatility would have
a very positive impact on the strategy.
[212]
Notice that I used the word âincreaseâ
in implied volatility, not just volatility.
[218]
We want increasing volatility.
[219]
We want a stock to go from calm to really
crazy and trading all over the place.
[225]
That's great.
[226]
If it actually happens the other way where
volatility calms down or starts to subside
[232]
and we have a stock that has been trading
really crazy and now starts to trade in tight
[237]
or narrow range or flat, that's not good because
this strategy is designed to profit from a
[243]
big move in either direction.
[245]
Volatility thatâs calming down is not going
to be good for us and thatâs going to decrease
[249]
the value of these options leading to losses.
[254]
Time decay also has the same sort of impact
on this strategy.
[258]
Because we are long two options, that means
that we have a negative time decay feature,
[263]
so time decay actually is really going to
hurt our option strategy.
[268]
Consider that you're not long one option,
but two.
[271]
This means that the underlying stock really
has to move twice as fast as it normally would
[277]
with a long call or long put.
[280]
Because youâre long two options, every single
day that passes is like double time decay.
[286]
You are losing twice as much money on time
decay.
[289]
Itâs kind of a âmake-it-or-break-itâ
type of a situation with this strategy.
[292]
Itâs either got to move really quickly right
out of the gate or youâre going to have
[295]
to get rid of it and take the loss.
[299]
The breakeven points on this strategy are
very easy to calculate.
[302]
All youâre going to simply do for the upper
level breakeven point is take the long call
[307]
strike and add the premium that you pay for
the overall strategy.
[311]
In this case, weâd take 45, add the premium
that we paid and this would be our breakeven
[317]
point on the upper level.
[319]
On the lower level, what you would do is take
the long put strike price and subtract the
[324]
premium that you paid.
[326]
Again, 35, weâre going to take that, subtract
the premium that we paid and that gets our
[332]
long put or lower level breakeven point.
[336]
If we take a look at a quick example, letâs
say like I was talking about earlier, the
[340]
stock is trading at its price of $40, so right
in the middle of this profit loss diagram.
[346]
Weâre going to buy one 45 call for $100
and weâre also going to buy one 35 put for
[353]
$100.
[354]
This creates a $200 debit on the trade or
$200 if we actually have to outlay because
[360]
weâre buying these options, so we give that
money to the market.
[364]
The maximum loss is the $200.
[367]
We canât lose any more money than we gave
out.
[369]
If the options expire worthless, we just lose
our $200.
[373]
Thereâs no unlimited loss feature.
[376]
And the maximum profit is unlimited theoretically.
[379]
The stock could go up and continue to move
higher to infinity if it wanted to.
[385]
Thereâs really no range bound to the stock
movement.
[388]
We just need it to move in any direction as
fast as possible.
[393]
Some tips and tricks that Iâve learned along
the years: On the outside, this looks like
[397]
an easy winner, an easy trade, a homerun even,
same thing with a long strangle.
[403]
But these strangles can be very, very difficult.
[405]
You want to use them during periods of low
to high volatility versus adding it during
[411]
periods of already high volatility.
[414]
We want to trade this on a stock thatâs
calm now that we think could break out in
[418]
a major way soon.
[420]
These are really favorite strategy of earnings
traders, traders who trade around earnings
[425]
for Google, Apple, RIM, etcetera.
[429]
But look to close out the position early if
you get a quick move in implied volatility
[433]
without any move in the underlying stock.
[435]
If you do this correctly and you trade it
from periods of low volatility to high volatility,
[440]
if you get a quick move in volatility or a
quick move in the underlying stock that creates
[444]
a profit, take the profit.
[447]
You have a very wide area of loss here.
[450]
Even though thereâs unlimited feature, that
does not always happen.
[454]
If you get a good solid move in the underlying
stock, whether itâs up or down, donât
[459]
try to ride it all the way till expiration.
[461]
Take the money off the table and live to trade
another day.
[465]
As always, I hope you guys enjoy this video,
and thanks for watching.
[469]
Please share the video right below here on
any of your favorite social networks if you
[474]
really did enjoy the video.
Most Recent Videos:
You can go back to the homepage right here: Homepage