PREMIUMLong Strangle
Overview:
Investors purchasing a long strangle are expecting the underlying stock to make a large move in either direction. The strategy is accomplished by simultaneously purchasing a call option and a put option with different strike prices. Both of the options will have the same expiration month. The investor in a long strangle benefits from either a large upwards move in the stock or a large downwards move in the stock.
Main Uses:
There are two main reasons why an investor would want to purchase a strangle:
- Investors buy strangles when they are looking to buy volatility. The idea behind this trade is that volatility is relatively cheap compared to historical volatility and it should increase in price.
- An investor will also use this strategy to make an earnings play. Sometimes when a company makes an earnings announcement, the stock will have a very large upswing or downswing, depending on the news. RIMM is one of ONN’s favorite stocks’ to discuss. They have had some very volatile earnings, making them a potential long strangle play.
Profit / Loss Long Strangle:
The chart below illustrates the profit/loss profile for a long strangle on RIMM. The investor purchased the March 60-70 strangle for $3. The strike prices are nearly equidistant from the stock price. The investor will make money if RIMM moves above $73 or below $57. If RIMM does not increase or decrease past one of the two strikes, the investor will lose 100% of the premium paid. This chart was created using a virtual trading account from OptionsHouse.
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