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Option Strategies Details

Setup

Buy one OTM Call and buy one OTM Put

Typical Application

1. Speculate on a large increase or large decrease in price and a large increase in volatility

Volatility forecast

Up

Price forecast

Up a lot or Down a lot

Breakeven

Long Put strike minus the debit paid or Long Call strike plus the debit paid

Max contract loss

Cost of the Long Strangle

Max position loss

same as Max Contract Loss

Long Strangle

Level: Beginner
2 Legs
Debit
Beginner
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You buy (long) one OTM Put and buy (long) one OTM Call

Description

A trader who wants to speculate on a large increase or decrease in price and a large increase in volatility can buy a Long Strangle. The trader pays a debit, called a premium, to buy both the Put and the Call and has the right, but not the obligation, to buy 100 shares at the Call strike price and sell 100 shares at the Put strike price.

Suppose stock XYZ is trading at $43. You forecast a large increase or decrease in price and a large increase in volatility.

You buy a $41 / $45 Long Strangle (buying the $41 Put and buying the $45 Call) and pay a $1.76 debit to express this view. Your breakeven prices at expiry are $39.24, the long Put strike minus the debit paid, and $46.76, the long Call strike plus the debit paid. The theoretical max profit is unlimited as XYZ price may increase infinitely or decrease to zero, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to sell to close at a variety of XYZ prices as the market value of your $41 / $45 Long Strangle changes.