Bought Suncorp (SUN) Strangle Recommendation

Posted on October 12th, 2010 admin No Comments

Options Trade:

BUY 3 SUNI87 Apr 539 Calls @ 38

BUY 3 SUNIM7 Apr 514 Puts @ 32

Net Cost: $0.70

Total Cost = $0.65 *3 *1020 (1020 shares per contracts)

= $2,142

This trade does not require margin.

Maximum Profit

The ideal result is for the share price to increase or decrease over $0.70 in the next month and a half (6 weeks). The trade will be profitable if the trade is outside of $4.44 and $6.09 at expiry, however maximum profit is unlimited.

Maximum Loss

This will occur if the share price is between $5.14 and $5.39 at expiry in April. That is if Suncorp stays within this 25 cent range. We feel it is unlikely to stay still for the next month and a half with the current level of market volatility. If the share price stays still we will look for an opportunity to alter this trade so maximum loss is avoided.

The maximum loss is the cost to enter the trade.

= $0.70* 3*1020

= $2,142

Please note: Maximum profit and loss calculations, do not include brokerage costs.

Breakeven

The breaks evens at expiry are $4.44 and $6.09.

Technical Analysis

The trade objective is to sell one of the legs of the trade for the cost of entering the trade. The remaining option trade would be a free trade which the profit would be equal to the price this leg is sold for. To do this we would need the share price to move approximately $0.70 in the next month. The Average True Range (ATR) is $0.40 at the moment which means a $0.70 move in the short-term is possible. Also at the moment volatility is low which means the trade is cheap to enter considering the trade goes for over 6 weeks.

Chart



Risks:
1. Suncorp doesn’t move in the next month.
2. Volatility decreases.

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

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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 pay-off is demonstrated below.

Bought Call Bought Put
Bought Strangle


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

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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

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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

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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

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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

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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

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

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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

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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

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Sold Strangle

Posted on March 22nd, 2010 admin No Comments

The sold strangle is the converse of the long strangle. The call and put options are sold instead of bought. The investor loses if the underlying security increases or decreases enough; but if the stock price remains stable then the options expire and the investor gets to keep the premiums.

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

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