How to Trade Options Strangles

Options strangles involve buying both a call and a put contract which includes same strike prices and expiration dates. You are looking for a big move in the underlying stock. The price of the stock needs to have a big move in either direction in order to profit. Strangles give you more room to profit in either direction and are cheaper than straddles. They are great for speculative trading. Watch our video on how to trade options strangles.

What Are Options Strangles and How to Trade Them?

Options strangles involve buying both a call and a put with the same strike prices and expiration date. You purchase when you believe stock is going to move in either direction. Price needs to go dramatically in one direction to profit. The second contract will take the loss.

Options trading has many different strategies. You can hedge your bets or trade based on speculation. Options strangles are great for speculation. Especially since direction is important to trading. Watch our video on how to trade them. 

Who wants to be able to make money no matter what the market is doing? Many times the market trades sideways and it can be hard to find plays. Hence why options trading has become so popular. 

There are beginner to advanced strategies with options. As a result, you can make money no matter what the market is doing; whether up down or sideways.

Basics

Options Strangles

One such advanced strategy is are options strangles. But before we get into strangles, we need to understand the basics first.

What is an option? An option gives you the right but not the obligation to buy (call) or sell (put) at a set price within a certain time. One contract controls 100 shares and they expire.

Calls and puts make up every options strategy. In essence, they’re the foundation of options and a good thing to understand.

A great thing about options is the fact that you can trade the large cap stocks without shelling out the capital to do so. In fact, it makes a great way to grow a small account.

Without a safe penny stocks list, you’re susceptible to the manipulation of the sector. You can’t pump and dump options because they’re larger cap. 

As a result, we do send out real time alerts for different options strategies. You’re given entries and exits all without pumping and dumping.

However, remember that options have more moving parts than stocks. That can affect things like options strangles.

Definition

Investopedia defines options strangles as a strategy where the investor holds a position in both a call and a put option with different strike prices, but with the same expiration date and underlying asset.

Sounds a little like vertical spreads right? Something you’ll find the deeper you get in to options, is that the strategies are similar.

However, options strangles are a little different because they’re not purely directional while still being directional. Sounds confusing right?

When Should You Buy a Options Strangle?

You should buy options strangles when you know the stock’s going to move but you’re not sure of the direction. As a result, you’re covering your bases. However, here’s where direction comes in. You need to stock to make a dramatic move in one direction. Therefore, you will end up taking a loss on the contract that’s headed in the other direction.

So while direction is mandatory, it’s different than most options strategies because you don’t have to be spot on in choosing direction.

How to Build a Strangle

Options strangles are formed when you buy a call and a put. However, you want them to have different strike prices.

Since options expire, you want options strangles to have the same expiration date. To recap, you want different strikes with the same expiration.

Many times, your broker will have options strangles already built for you. However, you have the ability to go in and edit strikes if needed.

Check out our trading service if you want to learn more about trading different options strategies. 

Options Chain

Is the Long Strangle a Good Strategy?

  • There are a couple ways you can trade options strangles. The long strangle is one. In fact, this is the most common way to trade strangles.
  • Long options strangles are formed when you buy out of the money calls and out of the money puts together. The call options has the higher strike price.
  • The higher strike should be higher than where the stock is currently trading at. The put strike price needs to be lower than current stock price.
  • Therefore, the stock should be trading between the two strikes. Long strangles have the potential to have a large profit margin because there’s no profit cap if the call side takes off.
  • The put side profits if price falls a lot. The risk on the trade is limited to the premiums paid for the contracts.
  • You have unlimited profit potential on either the call or the put side. The loss would be how much you paid for the contracts.
  • You will profit on this trade because price is going to move up or down. However, price needs to move a lot to profit.

Is the Short Strangle a Good Strategy

  • The other way to trade options strangles is to take a short strangle position. With a short strangle, you’re selling an out of the money put and an out of the money call.
  • This is a neutral strategy and the profit potential is limited. For this to be a profitable strategy, you’d need price to stay between the two strikes but in a narrow range.
  • You can’t have the large moves in price. Therefore, this is like an iron condor in that it’s a neutral strategy.
  • Your max profit comes from being the writer of the strategy; also known as the seller. Hence you’re receiving the premiums for writing the two contracts. That makes for less trading costs.

A Real Life Example

Let’s say you’re looking at trading AMD. You decide you want to trade a strangle. So you buy a call and a put.

The call has a strike price of $31.50 . The put’s strike price is $31. That’s the prepopulated strikes on TOS. You can go in and change them if you’d like. 

The premium to place the trade is $190. Therefore, you’re risking $190 with the potential of infinite profit.

With long options strangles, you want volatility. If price stays between the strikes, you’re losing the premium you paid.

If volatility comes in, you’re going to profit on the side that moves most. However, you will take a loss on the contract that’s headed in the opposite direction.

You usually make a profit because you need that large price movement. And you’ll only lose the premium paid for the losing trade.

Want to see options strategies in action? Check out our live trading room.

What Is the Difference Between a Straddle and a Strangle?

Options straddles and strangles are very similar strategies that both benefit from large moves in a stocks underlying price in either direction. A strangle has two different strikes and a straddle has one strike.

There are two strategies known as strangles and straddles. How are they different? We know that many times options strategies have different names of the same strategy.

In fact, options strangles and straddles are quite similar. They both profit from large moves in either direction. The difference comes in how you put the trade together.

A long straddle involves buying at the money calls and puts where the strike prices are the same as the stock price. Strangles should be out of the money.

Short straddles and strangles are very similar. You’re the seller and you benefit from more neutral moves.

Options straddles profit when price moves from the strike price in the amount of the premium paid. For example, if you paid $190 for a straddle, you’d only need the stock to move in amount equivalent to $190 in either direction to profit.

Therefore, you don’t need as much of a significant spike in price. However, that makes options strangles less expensive than strangles.

The greater the risk, the less expensive. The seller of the risky option wants you to take it because they have a higher probability of profiting. Hence why it’s cheaper. 

Pros and Cons

A great plus side to options strangles is the ability to profit in either direction. In fact, strangles are cheaper than other strategies like a strangle.

Therefore, you’re not putting up as much capital to play both sides of a trade. As a result, you’re given unlimited profit potential.

Some downside is the fact that it is risky. You need price to move a large amount in one direction. On days when the market is trading sideways, that can be more difficult.

However, large cap stocks tend to have larger price swings. That’s why trading options on the large caps is so profitable.

Take our advanced options strategies course.

Direction Matters

Direction is an important part of stock market trading. The moving parts of options can affect both profit and loss. Hence the need to be able to read charts.

Options strangles allow for profit in either direction. However, if you bought a naked call or put and the trade goes against you, you could be out the entire premium paid. 

Strategies like spreads, straddles and options strangles are meant the cap risk. However, remember that strangles are riskier because the profit isn’t capped.

Option strangles need a big price move in one direction. Therefore, you want to be able to see the patterns for potential breakouts.

If you’re going in blind, you’re going to lose. You need to have a plan with risky strategies.

The Bottom Line

Options strangles are a risky but lucrative strategy. As a result, you need to practice trading them ahead of time to make sure you know the best times to take the trade. 

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