Bought Strangles Identifying Trades – The Greeks

Posted on October 12th, 2010 admin
Bought Strangles Identifying Trades – The Greeks 5.00/5 (100.00%) 1 vote

Delta

The net delta of a bought strangle is approximately 0 when the bought call and put strike price are even distance from the share price. If the share price is closer to the bought call the net delta will be slightly positive and if the share price is closer to the bough put the net delta will be slightly negative. As the share price increases the net delta will also increase due to the bought call delta increasing and the bought put delta decreasing. So this indicates that the net delta starts of relatively neutral and becomes positive or negative depending if the share price increase or decreases.

Vega

The bought strangle is affected by the volatility of the share price. The bought strangle is implemented when volatility is low and expected to increase. This is a major influence on the strategy pricing as there are two bought options. Information on identifying volatility trends is explained in the technical analysis section.

Theta

Time decay has a very negative effect on the bought strangle. As the strategy is made up of two bought options the impact of time decay is emphasised. One way to reduce the effect of time decay is to buy a long-dated strangle as time decay effects the option prices most in the last three months. The trouble with this is that you have to pay a lot to enter these trades and therefore they have larger risk (maximum loss).

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Bought Strangles Identifying Trades – The Greeks
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The net delta of a bought strangle is approximately 0 when the bought call and put strike price are even distance from the share price.

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