Long Strangles
A long strangle is a neutral strategy with medium risk and high reward potential.
How it works: If you expect a stock to move quickly, either up or down, this is a good strategy.
You will A) purchase a put one strike price below the current price and B) purchase a call one
strike above the current strike price. If the stock jumps or drops dramatically, it will catch
Example: Our stock is selling for $65. We would A) buy the $60 put and B) buy the $70 call.
Anywhere below $55 or above $75, we will begin to show a profit.
The payoff: The cost of a long strangle is usually less costly than a long straddle, since the
near-the-money options cost less than those at-the-money.
The drawback: If the stock doesn't move, you can lose the price of both options.
|
