Learn Stock Trading - Strangle Options

 The long strangle option is simply the simultaneous purchase of a long call and a long put on the same underlying security with both options having the same expiration but where the put strike price is lower than the current stock price, while the call strike price is higher than the current stock price.  The long strangle expires worthless if the underlying price is at or between the strike prices at expiration.  The strangle option will generally provide more leverage when compared to a straddle as it is normally less expensive to purchase a strangle option than a straddle.  A long straddle involves the simultaneous purchase of a log call and long put with the same strike price, with one of them being in the money, and therefore having a high premium.  The long strangle is a not a directional strategy, but rather one where the stock is highly volatile and the investor feels extremely large price swings are forthcoming but is unsure of the direction.  The long strangle option is best employed on stocks in industries known for volatility, such as biotech and internet.  An instance of when a strangle option may be considered is when an earnings announcement is forthcoming.  The investor does not know if the earnings will meet expectations, but he expects a large move in the stock price after the announcement.  A larger difference between the strike prices means that the investor will pay less in premium, but he requires a greater move in the price of the stock to realize a profit.  It is a tradeoff between certainty of profitably and the amount of profit.  The maximum profit on the call is theoretically infinite because a stock price can increase infinitely.  The maximum profit on the put is finite because the stock value can only go as far down as zero.  Though the potential loss is predetermined and limited in dollar amount, it can be as much as 100% of the premiums initially paid for the strangle option.  A short strangle involves the simultaneous sale of put and call options on the same stock but with different strike prices.  If the stock remains between the strike prices, the options will expire worthless, and the investor will keep the premiums received.  The short strangle option is a good play for stocks in industries that are largely stagnant, such as local utilities.  How large the difference between the strike prices should be is determined by how volatile the investor believes the stock is.  A more volatile stock should have a larger difference, though that will reduce the premium the investor will receive from selling the options.