Bought Strangle Psychology

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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.


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Disadvantages of Bought Strangle

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  • 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.


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Advantages of Bought Strangle

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  • 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.


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Bought Strangle – Max Profit – Max Loss – Breakeven

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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

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The Bought Strangle Strategy

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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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Sold Straddle

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A sold straddle is a non-directional options trading strategy that involves simultaneously selling a put option and a call option of the same underlying security, strike price and expiration date. The profit is limited to the premiums of the put option and call option, but it is risky if the underlying security’s price goes up or down much. The deal breaks even if the intrinsic value of the put or the call equals the sum of the premiums of the put and call. This strategy is called “non-directional” because the short straddle profits when the underlying security changes little in price before the expiration of the straddle. The short straddle can also be classified as a credit spread because the sale of the short straddle results in a credit of the premiums of the put and call.

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Bought Strangle

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The bought strangle involves buying both a call option and a put option of the same underlying security. Like a long straddle, the options expire at the same time, but unlike a straddle, the options have different strike prices. The owner of a bought strangle makes a profit if the underlying price moves far enough away from the current price, either above or below. Thus, an investor may take a bought strangle position if he thinks the underlying security is highly volatile, but does not know which direction it is going to move. This position is a limited risk, since the most a purchaser may lose is the cost of both options. At the same time, there is unlimited profit potential.

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 Straddle

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A bought straddle involves purchasing, both a call option and a put option on some stock. The two options are bought at the same strike price and expire at the same time. The owner of a bought straddle makes a profit if the underlying price moves a long way from the strike price, either above or below. Thus, an investor may take a long straddle position if he thinks the market is highly volatile, but does not know in which direction it is going to move. This position is a limited risk, since the most a purchaser may lose is the cost of both options. At the same time, there is unlimited profit potential.

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