Investing takes as much market knowledge as it does luck. However, there are a few ways to put luck in your corner when it comes to investing on the market. With this being said, we’re going to cover one of the more important aspects of investing called strangle investing.What Is A Strangle?
A strangle is a particular investment strategy that involves the sale or purchase of certain option derivatives that allow the holder to profit based on the price of underlying security moves. However, the exposure given is fairly small when it comes to the direction of the price movement.
Purchasing these options are known as a long strangle, but the sale of the same options is commonly known as a short strangle. As strangle options are often confused with straddle options, strangles can be made with low costs for low profit (unlike straddles). In addition to this, strangles can also be used low options on futures, index options, or equity options.
What Is A Long Strangle?
A long strangle involves a put option and a call option, carrying the same underlying security as it goes long (buying). A long strangle is much like a straddle, with a long strangle’s options expire at the exact same time. However, a long strangle’s options have different strike options (which is unlike a straddle). Other great positives that come with long strangles are:
- Prices for strangles are considerably less than saddles if the strike prices happen to be out-of-the-money.
- A long strangle owner makes profit if the underlying prices move far away from the current price, regardless if it goes above or below.
In the end, there’s limited risk if the investor loses both options with unlimited potential to make profit from a long strangle.
What Is A Short Strangle?
A short strangle involves a put option and a call option, carrying the same underlying security as it goes short (buying). A short strangle is much like a short straddle, with a short strangle’s options expire at the exact same time. However, a short strangle’s options have different strike options (which is unlike a short straddle).
Strangles & You
Now that you have a better understanding of strangle options, there’s a few things to consider for yourself. Buying options can come with daily decay and nothing is worse than investing to watch the option slowly pass away in the 59 day timeframe. If you see this happening, it may be a good idea to take some options off if the strangles happen to go your way. However, it should be noted that closing an option early will impact the potential for returns, and (of course) the additional costs for pulling out.
So considering the information above, strangles are an excellent strategy due to the fact that they do not necessarily need single directional opinions. If you happen to feel as if there’s going to be a chance of a significant movement with the investment, you can still make money regardless of your confidence in the movement. If you’re looking to spend less capital for pursuing a goal, a strangle may be your ticket to a satisfying investment.