Bought Strangles – Breakevens

Posted on October 12th, 2010 admin No Comments

It is important to identify whether the breakevens of the trade are realistic. When indentifying a trade I run through the following checklist.

  1. Draw the breakevens on the chart.
  2. Draw the support and resistance levels on the chart
  3. Identify the ATR of the underlying asset.

This checklist allows you to see the distance the breakevens are from the share price and if these levels are realistic. Then check if where the next support and resistance levels are. The next resistance should be higher than the upper breakeven and the next support level should be below the lower breakeven.

To receive ASX Option Recommendation or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 07 5504 2244 or info@totaloptions.com.au

Bought Strangles Identifying Trades – The Greeks

Posted on October 12th, 2010 admin No Comments

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).

To receive ASX Option Recommendation or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 07 5504 2244 or info@totaloptions.com.au

Bought Strangles: Options Pay-off

Posted on March 24th, 2010 admin No Comments

A bought strangle is made up of a bought call option and a bought put option. Combine these two trades together and if there is a different exercise price you have a strangle. A bought strangle options pay-off is demonstrated below.

Bought Call Bought Put
Bought Strangle


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Bought Strangle Psychology

Posted on March 24th, 2010 admin No Comments

There is a time and a place for bought straddles and strangles. Ideal market conditions are when volatility is low and expected to increase. The bought strangle is a non-directional trade with the share price able to move upwards or downwards to profit in this strategy.

The idea with bought strangles is to identify a large share price move. This share price move can be either an increase or decrease in share price. To identify these moves you can look at technical analysis and fundamental analysis. Technical analysis tried to identify a break out pattern, while the fundamental analysis indentifies a particular announcement that may cause a large move in share price.


To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Disadvantages of Bought Strangle

Posted on March 24th, 2010 admin No Comments
  • It is possible to lose more money if the stays still or within the breakeven range than if you simply bought a call or put option.
  • If the share price rises above the strike price or falls below the strike price but remains below the upper break even or above the lower break even you will still incur a loss on the position.
  • If volatility falls for both or either option, the position could lose with or without a move in share price.


To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Advantages of Bought Strangle

Posted on March 24th, 2010 admin No Comments
  • It is possible to profit no matter if the share price goes up or down.
  • A strangle has a lower net debit than the bought straddle.
  • A higher profit in percentage terms than a straddle on the same move in the underlying stock, provided that breakeven point has been exceeded.
  • Since both options are out-of-the-money, time decay on the options is not as rapid as they are with the bought straddle.
  • Unlimited profit if the underlying asset continues to move in one direction.
  • Since the trade is non-directional your outlook can be wrong and still profit from this strategy.
  • The maximum loss is limited to the debit paid.
  • If volatility is low at the time of purchase and volatility rises, both options could profit even without an appreciable change in the stock price.
  • Smaller capital outlay to trade strangles than trading the underlying shares.


To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Bought Strangle – Max Profit – Max Loss – Breakeven

Posted on March 24th, 2010 admin No Comments

Maximum Profit

Profit is attained when the share price increases or decreases substantially past the break even points. The maximum profit of a strangle is unlimited.

Maximum Loss

The maximum loss is possible if the share price is between the strike prices of the bought call and put option at expiry. This means both the call and the put would expire worthless and the maximum loss would occur. The probability of the maximum loss depends the distance between the strike price of the call option and put option. The closer the exercise prices are the less likely there will be a maximum loss as one of the options should be in-the-money and have intrinsic value. If the exercise prices are further apart time decay will be a major factor and maximum loss is possible.

The maximum loss for a bought strangle or straddle is limited to the net debit paid. The net debit paid is the premium paid for the call options and the premium paid for the put option. Therefore it is possible to lose your initial investment but no more.

Break Even

There are 2 break even points to a straddle. One breakeven point if the underlying asset goes up this is called the upper breakeven point. The other breakeven point if the underlying asset goes down which is the lower breakeven point.

Upper Breakeven Point: Strike Price + Net Debit Paid

Lower Breakeven Point: Strike Price – Net Debit Paid

To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

The Bought Strangle Strategy

Posted on March 24th, 2010 admin No Comments

The bought strangle, is a volatile option trading strategy that profits when the stock goes up or down strongly. The Strangle is a similar to the bought straddle. The strangle is in essence a technique used to place a straddle at a cheaper price. The strangle requires a lower debit amount to put on and works exactly like a straddle. One should use a strangle when one is confident of a move in the underlying asset but is uncertain as to which direction it may be. These uncertain moves can be identified through both fundamental and technical analysis.

Establishing a strangle simply involves the simultaneous purchase of an out-of-the-money call option and an out-of-the-money put option on the underlying asset. An out-of-the-money call option allows you unlimited profit to upside when the stock moves higher than the strike price with limited loss to down side. An out-of-the-money put option allows you unlimited profit to downside when the underlying stock moves lower than the strike price with limited loss to upside. Combine them both and you will have a strangle which profits when the underlying stock moves up or down beyond the strike price of the respective options. As the out-of-the-money options in a strangle is cheaper than the at-the-money options in a straddle, a strangle is sometimes described as a “cheap straddle”.

Author: Matthew Gartrell

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Bought Strangles

Posted on March 22nd, 2010 admin No Comments

The e-book will have detailed information about the bought strangle strategy. This is because this is the most common strategy and the strategy that I find most profitable. The bought straddle is very similar and references to the strategy will be made throughout the e-book. The sold straddle and strangle are great strategies but have much higher risks, therefore is you would like more information please contact me directly.

To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Sold Straddles vs. Sold Strangles

Posted on March 22nd, 2010 admin No Comments

If you are a straddle seller you have a greater maximum reward (credit for selling the options) but also a larger risk of losing all the reward and more if the stock moves too far from the strike price. If you are a strangle seller, you have a lower maximum reward (less time premium sold) but also a lower risk that the stock will move outside of the strangle strike window to lower the reward or even go to a deficit. The sold strangle has a lower potential profit than the sold straddle, however it offers greater protection since the share price must move further to result in a loss.

To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au