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Long Strangle, Short Strangle |
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Long Strangle
This strategy is similar to the Long Straddle, except that the trader purchases the call option(s) and the put option(s) at different strike prices. The trader should purchase a certain number of out-of-the-money (OTM) call contract(s) and then purchase the same number of out-of-the-money (OTM) put contract(s) for the same target month. The Long Strangle has unlimited profit potential if the stock price moves enough in either direction. Since the trader is buying options there is a net debit to open the position. By purchasing both a call and a put, there are both upper and lower break even points. A profit is realized if the stock rises above the upper break even, which has a possibility of unlimited profit potential, or falls below the lower break even, where the limited profit potential from the lower break even point to zero. This position is considered a neutral strategy as the trader will profit on the position from a movement in either direction. The advantages to this position for the trader are that the maximum loss is limited to the original cost of the position, that the net debit is lower than that of the Long Straddle, and since both options are OTM, price decay is not as rapid as it would be on a Long Straddle. However, the risks include maximum loss should the option expire between the two strike prices; loss should the price rise above the call strike price but remain below the upper break even; and loss should the price fall below the put strike price but remain above the lower break even. Traders should remember that since they are purchasing two different strikes, they may need a significant movement in either direction to obtain a profit.
Short Strangle
This is similar to the Short Straddle strategy, except that the trader sells the call option(s) and the put option(s) at different strike prices. The investor should sell (short) a certain number of out-of-the-money (OTM) call contracts while simultaneously selling (shorting) the same number of out-of-the-money put contracts for the same target month. The Short Strangle position has a set maximum profit and potentially unlimited risk if the stock goes against the trader. Since the trader is selling options there is a net credit when the position is opened. The maximum profit is equal to the net credit and is realized if the currency remains stagnant and stays between the two sold strike prices at expiration. By selling both a call and a put there is both an upper and lower-break even. Profit is realized if the price is above the lower break even or below the upper break even at expiration. This is a neutral position as the trader will profit from the position if the stock stays stagnant and expires within the profitable range. There is a potentially unlimited risk as the option(s) may need to be bought back to avoid assignment.
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| Symbol |
Rate |
| GBP:CHF |
1.747703 |
| GBP:JPY |
155.484239 |
| GBP:USD |
1.638403 |
| NZD:USD |
0.627050 |
| EUR:CAD |
1.545998 |
| EUR:CHF |
1.516857 |
| EUR:GBP |
0.867915 |
| EUR:JPY |
134.947096 |
| EUR:USD |
1.421994 |
| AUD:JPY |
76.394373 |
| AUD:USD |
0.805000 |
| USD:CAD |
1.087204 |
| USD:CHF |
1.066711 |
| USD:JPY |
94.899879 |
| USD:SEK |
7.613010 |
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Disclimer: This website is for informational purposes only and is not intended to provide
specific commercial, financial, investment, accounting, tax, or legal advice.
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© ForexCenter.com, 2005, All Rights Reserved
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History