Options trading is very popular. There are a number of options trading strategies available to investors, and it is these strategies that make options trading so powerful.
Of all the options trading strategies, the long strangle is one exceptional strategy that every investor should consider. It involves buying a call option and put option, of the same underlying asset simultaneously. While just like the straddle (another options trading strategy), the expiration date remains the same, but in long strangle strategy, investors can buy the call option and put option with different strike prices. Typically, the call strike prices will be above the put strike prices, and both the options will be out-of-the-money. Because of out-of-the-money strike prices, the strangles will prove less expensive than the straddles; however, to reach the break-even, it requires a substantial move in the in the price of the underlying stock.
The reason why this options trading strategy is worth considering is its limited downside risk. The investor will incur loss only if the price of the underlying stock remains between the strikes until the expiration. At the expiration, if the price of the stock is between the strike prices, then both the call and put options will expire as worthless, and the premium paid by the investor for those options will have been lost.
The limited downside risk is not the only thing that makes the long strangle options strategy great. This options trading strategy offers unlimited gain potential. The investor gains when the price of the underlying stock moves significantly. If the underlying stock becomes valueless, the gains would be substantial. The gross profit at the expiration will be the difference between the price of the stock and (1) the strike price of the put if the underlying stock’s price is lower or (2) the strike price of the call if the underlying stock’s price is higher. The net profit would be the gross profit minus the premium paid by the investor for the options. The upside potential has no limit; while the downside potential has a limit because the no stock price can go below zero.
Thus, the potential profit by utilizing the long strangle options strategy is unlimited on the upside and considerable on the downside. The possible loss, on the other hand, is limited to only the premium paid for purchasing the options.
Want to learn more about long strangles and other options trading strategies? Total Options, experts in options trading in Australia, can help. They have considerable experience in options trading in Australia, and can give excellent ASX options advice. They also have Australia options education program, which teaches everything about options trading in Australia. To know more, visit www.totaloptions.com.au.