Strangle Strategy: Your Ultimate Guide to Crashing Market Uncertainty | by Ayrat Murtazin | January 2024

Hey fellow options trading enthusiasts! Are you ready to grasp an effective strategy that can navigate you through uncertain markets? You have landed in the right place! Today, let’s delve into the intricacies of strangles – an effective options trading strategy that can yield significant profits if executed wisely. While I haven’t used chokes in turning $10,437 into $111,669 in 13 months of options trading (that’s a story for another day), it remains an excellent addition to your trading toolkit. Let’s dive in!

Strangle Strategy: Unveiling the Mystery

A strangle involves the simultaneous purchase of an out-of-the-money (OTM) call option and an OTM put option on the same underlying stock with the same expiration dates. The essence of the strategy consists in profiting from significant price movements, disregarding the direction of the stock.

Why choose Strangles? Benefits and risks

Ideal for traders who expect significant price swings but are unsure of the stock’s direction due to events such as earnings announcements or market uncertainty. Key benefits include:

  • Limited risk: The maximum loss is limited to the premium paid for the options.
  • Unlimited profit potential: Profits rise with significant movements in stock prices.

However, there are associated risks:

  • Decay in time: Options lose value over time, requiring significant price movements before expiration.
  • High Break Points: Substantial movements in stock prices are necessary for profitable trades.

The setting of Strangle: The Fundamentals

To implement a throttle:

  1. Select the underlying action: Identify stocks poised for significant volatility.
  2. Select an expiration date: Opt for options that expire in a few weeks to months.
  3. Buy an OTM call option: Choose a call option with a strike price above the current stock price.
  4. Buy OTM Put Option: Select a put option with a strike price below the current stock price.

Remember that both options are bought at the same time and the total trading cost is the sum of the premiums paid for the call and put options.

Numbers Talk: A Strangle Trade Example

Let’s say you’re looking at XYZ stock, currently at $50, and you’re anticipating a major announcement that will trigger a substantial price move. Adjust the choke using:

  • Buying a $55 call option at $2.00 per share.
  • Buying a $45 put option at $1.50 per share.

The total cost of this choke is $3.50 per share ($2.00 + $1.50) or $350 per contract of each option.

Profit, loss and break-even points

Profits are realized if the share price moves significantly before expiration. The maximum loss is limited to the total premium paid ($350 in this example). Calculate the breakeven points by adding the total premium to the strike price of the upside call option and subtracting it from the strike price of the downside put option.

  • Turning Point Up: $55 (call strike) + $3.50 (total premium) = $58.50
  • Beyond the tipping point: $45 (put strike) — $3.50 (total premium) = $41.50

In this scenario, profitability begins if the stock price exceeds $58.50 or falls below $41.50 prior to expiration.

Closing the deal: Knowing when to close the throttle

Consider closing your tourniquet in the following circumstances:

  1. Achieved target profit: If the stock price moves significantly, selling both options will ensure profits.
  2. Before Expiration: If the stock price does not move enough, selling options minimizes losses due to time decay.
  3. Opposite market movement: If the stock moves against expectations, exiting the trade reduces losses.

Strangle Variations: Straddles and Iron Condors

For stranglers, similar strategies like straddles and iron condors are worth exploring. A straddle involves buying call and at-the-money (ATM) put options with the same exercise and expiration date. In contrast, an iron condor means selling an OTM call and put while simultaneously buying another OTM call and limiting risk.

While these strategies have the common goal of profiting from market volatility, they each come with different benefits and risks. Do your due diligence to align with your business goals and risk tolerance.

There you have it — a comprehensive guide to options trading stranglehold strategies. Remember, while chokes didn’t play a role in turning my $10,437 into $111,669 in 13 months (only mentioned once, I promise!), they remain an excellent tool for capitalizing on market uncertainty. So study, practice and get ready to choke your way to success! Happy trading folks!

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