No more struggles with the Strangles

Trading Strategy
If you have been doing Options Trading like Call Option and Put Option, you are probably
wondering now on how you will trade your Options to a more challenging and profitable way.
Step up and learn a new strategy!

For today, you can learn from us a strategy related to these that can give you the maximum
profit. Since you are already doing Options trading and familiar about "Out of the Money", we
will take a look at the trading technique for Strangles Trading.

Strike price - a price of the share agreed and exercised between the buyer and the seller

Market price - current price of the share in the stock market

Option premium - price you paid just like a reservation to buy an apartment or a house. Its
purpose is to not let others have a chance to buy the whole strike price first.

What is Strangles Trading?

Strangles Trading is an Options trading where an investor will use Out of The Money Call option
and Out of the Money Put option with option premiums to purchase or sell an underlying asset
(​must be same ratio​, ​1,000 shares of Call:1,000 shares of Put​ or ​3​,000 shares of Call:3,000
shares of Put​) at Strike Prices on the same expiration date or same future agreed date.

In this strategy, the Call Option’s strike price should be higher than the Put Option’s strike price.
It is like a tug of war between these two options and between profit and loss.

Just for the recap, ​Out of the Money​ means you will lose money on doing the following:

Call option​ ​(you are the one who paid the option premium to buy the share​)
You will lose the option premium money and lose the opportunity to earn profit when the strike
price (SP) is still higher than the market price (MP) on the expiration date

Out of the Money ​Call​ option = SP ​>​ MP

Put option​ ​(you will pay the option premium to sell the share at a strike price, but you
don't have an obligation to buy the share on the expiration date)
It is the opposite. You will lose the option premium money you paid. The strike price is lower
than the market price on the expiration date.

Out of the Money ​Put​ Option = SP ​<​ MP

For Strangles, the profit of one option is beyond the loss from the other option. Yes, you will
think that trading with these two options at the same time is safe or can be dangerous since you
are paying premiums for both options. Actually, not really if you have already done your
research and can mostly predict about the movement of market prices.

There are two strategies under the Strangles Trading. These are ​Long Strangle Strategy​ and
Short Strangle Strategy​. First, we will explain to you what is going on a Strangles trading.

How Long Strangles Strategy works

A Long Strangles strategy can be applied where the market prices will have a drastic change on
the same expiration date.

Long Strangles example

Today is February 12 and the expiration date is March 15.

Call option: When the call strike price is $170 and the option premium is $2.50

Put option: When the put strike price is $140 and the option premium is $0.50

If you add both premiums, you paid $3.00. The market price on the expiration date must be:

$173​ and ​above​ for Call option ($173 = $170+$3)

$137​ and​ below​ for Put option ($137 = $140-$3)

So breakeven must be $137 to $173

The example graph above looks like a tug of war/strangle right?
The March 15 expiration date comes and the market share is $178.65.

This means you earned more on Call option. Here’s how much you can get:

Profit: $178.65 - $170 = $8.65

Put option premium of $2.50 + Call option premium of $0.50 = $3

Net profit​ = $8.65 - $3 = $5.65

Another Scenario 1: Market price is $132

It means you will earn from the Put option. The more shares you paid for, the more profit you
gained.

Profit: $140 - $132 = $8.00

Put option premium of $2.50 + Call option premium of $0.50 = $3.00

Net profit​ = $8 - $3 = $5.00

Another Scenario 2: Market price is almost the same as Call strike price
When the market price at the expiration date is $172

Profit: $172 - $170 = $2

Put option premium of $2.50 + Call option premium of $0.50 = $3.00

$2 - $3 = ​-$1

In reality,​ ​you will lose the premium of $3.00 not $1​ because you are not obliged to buy the
shares and the Options become worthless unless you are still proceeding to buy the shares and
have a loss of $1. You might be waiting for the stocks to rise before selling the shares again.

Scenario 3: Market price is almost same or same as Put strike price

You will lose $3.00 (premiums you paid) and the Options become worthless.

The not so good news for Long Strangles:

If the market price is not moving much, you will lose the option premiums. Worst, you bought so
many shares.

The good news for Long Strangles:

UNLIMITED PROFIT if the market price has dramatic change or a large change, your profit on
one option will significantly get higher than the loss on the other option and the paid premiums
combined.

Also, LIMITED LOSS since the maximum loss you can get is the option premiums you paid
because you are not obliged to buy the shares on the Put and Call options.

In Long Strangles, the profit you will earn is much higher than the loss. Just be careful when
predicting the market price on the expiration date.

What’s the difference between Strangles and Straddles Trading?

Straddles has the ​same​ Strike price while Strangles has ​different​ Strike prices.
How Short Strangles Strategy works
If you are still confused whether you are going to use the Long Strangles trading strategy or not,
try this short one first. You do not need to do a deep analysis on whether the market price will
go down or up.

A Short Strangles strategy is is an Options trading where an underlying asset is being sold with
the assumption that there will be ​just a little movement in market price​ on the same expiration
date. Same with the long one, Call strike price should be higher than the Put Option strike price.

This is perfect if you think market prices will stay the same or almost the same.

The not so good news for Short Strangles:

If there’s limited loss on the long strangles, this one is UNLIMITED LOSS
LIMITED PROFIT since you will gain only the net option premiums paid to you.

The good news for Short Strangles:

SURE amount of PROFIT if the market price has no dramatic change and within the breakeven.
.
Safe way to invest within a short time period.

A Long Strangles strategy can be applied where the market prices will have a drastic change on
the same expiration date. For Short Strangles, strike prices offered will be near to the predicted
market price.

Short Strangles example

Today is March 2 and the expiration date is March 15. You are selling:

Call option: When the call strike price is $177 and the option premium is $0.50

Put option: When the put strike price is $175 and the option premium is $2.50

If you add both premiums, you paid $3.00.

So breakeven must be $172 to $180
($180 = $177 Call Option strike price +$3)
($172 = $175 Put Option strike price -$3)

The sure thing is, you already earned premium of $3.

The March 15 expiration date comes and the market share is $178.65.

This means you can still earn a bit from Call Option ($178.65 is more than $175 Put Strike price)
if the investor who paid the premium still decided to buy your shares.. Here’s how much you can
get:

Profit from per share value: $180 (Call Strike price) - 178.65 = $1.35

Put option premium of $2.50 + Call option premium of $0.50 = $3 ​premium collected

Net profit​ = $1.35 + $3 = $4.35

Another Scenario 1: Market price is $172

You will earn $3 premium collected.

Because if you compute it, you will not get a gain or loss in buying the shares.
If you will buy the shares, the investor will sell the shares to you again at $175 Put option Strike
price ($172 - $175 = ​-$3​). $3 premium collected + ​-$3 on share loss​, the answer will be 0. Just a
breakeven.

Another Scenario 2: Market price is $181

You will earn $3 premium collected.

If you proceed to sell the shares to the investors at $180 Call option Strike price ($180 - $181 =
-$1​). Selling stocks below the market share price will not gain a profit.

Another Scenario 3: Market price is $176

Profit from Call option: $177 - $176 = $1

Put option premium of $2.50 + Call option premium of $0.50 = $3 ​premium collected

Net profit​ = $1 + $3 = $4

Another Scenario 4: Market price is $180

You will earn $3 premium collected.

Because if you compute it, you will not get a gain or loss in selling the shares.
If you proceed to sell the shares to the investors at $180 Call option Strike price ($180 - $180 =
0).

Conclusion

Apologies, the stock became 178.66 at the time of the screencap. Let’s just pretend that the
market price is still 178.65 instead of 178.66
By the curves, you will see the difference between the distance of long strangle break even and
short strange breakeven.

The Long Strangles sample illustration earlier shows that the breakeven was used to show that
you can earn unlimited profits if the Put is below $137 and if the Call is above $173

The Short Strangles illustration earlier shows that the breakeven was used to show that you can
earn the combined Option premiums and it depends on the Market price if you will sell or buy
the shares to gain profit.
Try this Strangles Trading Strategy. With the right prediction, you might earn profits and
minimize your losses than just simply buying low and selling high market shares.