5.Strategy4:Low-Cost Arbitrage in High Volatility—Practical Application of Strangle Options Strategy

Tiger_Academy
2023-10-18
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Hello,

In the previous lesson, we learned about the basic concept of the straddle options strategy and how to implement it using an app. Today, we will introduce the fourth common portfolio strategy—strangle options strategy.

1. What is a strangle Options Strategy?

The strangle options strategy is quite similar to the straddle options strategy, with the key difference being that while the straddle strategy involves buying or selling both call and put options with the same expiration date and the same strike price, the strangle strategy involves buying or selling both call and put options with different strike prices but the same expiration date.

Compared to the straddle strategy, in the strangle strategy, the strike price of the call option is higher and the strike price of the put option is lower. This difference in strike prices results in a lower overall premium cost. If the view is prices will be very volatile then we would buy the strangle and if we anticipate that the stock will become less volatile we would sell the strangle.

The buying of a strangle strategy is suitable for scenarios where there is expected to be significant volatility in the future stock price. This could be during earnings seasons or the release of important economic data that could impact stock prices, and when it's difficult to predict whether the stock price will rise or fall.

Here's an example: Let's assume the current stock price of Apple is $187. We anticipate that after Apple releases its earnings report, there could be substantial price fluctuations, potentially beyond the range of $195 and $180. In this case, we can choose to buy call options with a strike price of $195 and put options with a strike price of $180, both expiring on the same date. The premiums for the call and put options are $0.04 and $0.07 respectively. The total premium cost for this strategy is $0.11.

If the future stock price rises above $195 or falls below $180, this strategy would yield a profit. Generally, the larger the price fluctuation, the greater the profit.

However, if the stock price remains within the range of $180 to $195, this strategy would not be profitable. Therefore, if you anticipate limited price volatility in the future, you can instead become a seller by implementing a short straddle options strategy. This involves selling the call and put options mentioned above, and the maximum profit would be the premium income of $0.11.

The biggest risk of this strategy is that if the stock price changes significantly, the potential loss is theoretically unlimited

2. How to Execute a strangle Options Strategy Using an App

In practical execution, you can directly use an app to match this strategy with a single click. The app can also calculate the potential profit and loss of the portfolio. Here's how to operate it:

Continuing with the example, if you want to execute a long strangle options strategy, start by tapping the strategy section at the bottom of the app and then selecting the strangle strategy. Click on the default settings, and adjust the price difference to 15 ($195 - $180). This will display all the option portfolios for different strike prices. Choose the desired strike price, then select "Buy." The app will automatically calculate the maximum profit, maximum loss, and profit-loss curve for this portfolio (note that all data in practical application is typically multiplied by 100 due to contract unit considerations, and it includes transaction costs like fees, leading to some deviation from theoretical values).

If you are planning to execute a short strangle options strategy, you only need to switch from "Buy" to "Sell" in the bottom right corner during the final step.

Okay, here we have finished the five lessons of the entire combined options small class. Through the study of these five lessons, we have understood the benefits of portfolio options strategies, and mastered the application scenarios and practical skills of 4 common strategies , I hope that everyone can better meet their income needs through portfolio investment strategies.

How to use combo options to trade earnings season?
Combo options are option trades constructed from multiple contracts of differing options. Combo options enable more precise risk management techniques, offer the potential for higher returns, and reduce the margin requirement. ---------------- How do combo options work? Will you use combo options to trade upcoming earnings season?
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
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Comments

  • Shyon
    2023-10-18
    Shyon
    Win 20 Tiger-coins
    Thanks for the lesson and let's learn about strangle options strategy today. In short, the buying of a strangle strategy is suitable for scenarios where there is expected to be significant volatility in the future stock price. This could be during earnings seasons or the release of important economic data that could impact stock prices, and when it's difficult to predict whether the stock price will rise or fall. @GoodLife99 @Aqa @b1uesky @icycrystal @Universe宇宙 @rL @koolgal
  • GoodLife99
    2023-10-18
    GoodLife99
    Win 5 Tiger-coins
    another option strategy Low-Cost Arbitrage in High Volatility - Practical Application of Strangle Option Strategy, come learn together Tigers!
  • koolgal
    2023-10-18
    koolgal
    Win 10 Tiger-coins
    🌟🌟🌟When price of a stock  is volatile or there is important news that will impact a stock like a Feds meeting, a Strangle Strategy is used.
    This involves buying a call with a Higher Strike price and buying a Put with a Lower Strike price with the same expiration date.
  • koolgal
    2023-10-18
    koolgal
    Win 5 Tiger-coins
    🌟🌟🌟Strangle Option Strategy is used when the expectation is that the price of a stock will swing drastically in one direction or another.  It does not matter which direction it moves.  The important point is that it happens.

    With a Strangle Options Strategy, the expectation is that the stock price will swing above the call price or below the put price.

    To set up a Strangle Option involves buying a Call Option that is higher than the current market price and Buying a Put Option that is lower than the current market price.  Both are bought with the same expiration date but the strike prices are different.

    .

  • koolgal
    2023-10-18
    koolgal
    Win 5 Tiger-coins
    🌟🌟🌟The difference between a Strangle and Straddle strategy is the strike price.

    In the Strangle Strategy, the strike price is different.  In a Straddle Strategy, the strike price is the same.

    Thanks @Tiger_Academy for your important lesson on Strangle Strategy in Options Trading today. .

  • koolgal
    2023-10-18
    koolgal
    Win 20 Tiger-coins
    🌟🌟🌟With the latest lesson on Strangle Strategy, I will share with my Tiger Friends @HelenJanet @icycrystal @MeowKitty @CL_Wong @Thonyaunn @Derrick_1234 @AlpineSnow @PhoenixBee @Taurus Pink @rL @Success88 please join me in this important lesson on Strangle Options Trading Strategy specially curated by @Tiger_Academy
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