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A long strangle is an options strategy similar to a long straddle, but also with different strike prices for the call and put options. It involves buying an out-of-the-money (OTM) call option and an out-of-the-money put option on the same underlying asset with the same expiration date. The call strike price is higher than the current market price, and the put strike price is lower.
Limited Profit Potential: Profits are capped by the difference between the higher strike price and the lower strike price minus the premiums paid for both options.
Limited Risk: Maximum loss is limited to the combined cost of both options (premiums paid).
Neutral Outlook: Similar to a long straddle, this strategy assumes the asset price will move significantly in either direction, but the direction itself is uncertain.
High Volatility Benefit: Profits potentially benefit from increased volatility as it amplifies potential gains in either direction. However, high volatility also increases the cost of options, impacting potential returns.
Buying the OTM Call Option: Grants you the right (but not the obligation) to buy the asset at the higher strike price by the expiration date. If the price rises significantly above the strike price, you can exercise the call option and profit from the difference.
Buying the OTM Put Option: Grants you the right (but not the obligation) to sell the asset at the lower strike price by the expiration date. If the price falls significantly below the strike price, you can exercise the put option and profit from the difference.
The asset price moves significantly up or down from the strike prices by the expiration date. You profit from exercising the in-the-money option (call if up, put if down), offset by the loss of the out-of-the-money option's premium.
Similar to a long straddle, the asset price can also move modestly in either direction, exceeding the breakeven points (slightly above the higher strike for calls, slightly below the lower strike for puts). This still offers some potential to profit, but gains are reduced compared to significant price movements.Similar to a long straddle, the asset price can also move modestly in either direction, exceeding the breakeven points (slightly above the higher strike for calls, slightly below the lower strike for puts). This still offers some potential to profit, but gains are reduced compared to significant price movements.
The asset price stays near the strike prices throughout the option's life. Both options expire worthless, resulting in a loss equal to the combined premium paid.
This strategy is suitable for investors who:
The break-even point for an option strategy is the underlying asset price at the expiration date where the strategy neither makes a profit nor suffers a loss. It takes into account the combined costs and potential payoffs of all options involved in the strategy..
In options trading, the probability of profit (POP) reflects the likelihood of your chosen strategy resulting in a profitable outcome by the expiration date. While it's not a foolproof indicator, it can be a helpful tool for assessing potential risk and reward scenarios.
Remember, even though the maximum loss is limited, the cost of buying both options is higher compared to other strategies. Additionally, time decay erodes the value of both options over time, regardless of price movement, further impacting your potential profit.