Options Trading Mastery: Option Strangles (veezq-44319)

The Strangle is another option strategy that features the use of options in unison with each other. The Strangle is philosophically identical to its 'cousin' the Straddle. However, whereas the Straddle has a single strike as its focal point, the Strangle has its focal point spread out over two strikes.

Related Writings:
Why Reinvest Profit Earned From Real Estate Investing? - Continued success in real estate investing requires that you keep tomorrow in mind when making decisions for today. Recklessly spending all of your profit earned without reinvesting a percentage of it can leave you without funds when something goes wrong.

The effect of this as compared to the Straddle is that the Strangle will produce wider break-even points and lower prices. The widening of the break-even points changes the risk/reward scenarios for both the buyer and the seller of the Strangle as opposed to the Straddle.

The benefit to the buyer of the Strangle is that it will cost less than a Straddle (thus less risk) but, like all risk/reward scenarios, less risk equals less reward. The buyer's trade-off for lower cost and less risk is that the stock will have to move significantly more than if the buyer had purchased a Straddle.

Related Writings:
Investing: Olympics Teach Investors A Lesson - Perhaps the only area outside the financial world where performance is so closely measured is the Olympics. Competition is fierce, and with events measured to the hundredths of a second, athletes go to great lengths to gain even the slightest edge. The Olympics can teach us a lot about investing.

The benefit to the seller of the Strangle is that it offers a larger margin of error in terms of the anticipated stock movement. The wider range of the break-even prices allows the stock to have more movement while still allowing the seller to profit. The seller's trade-off for this luxury is price. The seller will not bring in as much premium from the sale of a Strangle as opposed to the sale of a Straddle.

Related Writings:
Explaining Penny Stocks - Penny Stocks are amongst the most uncertain and unpredictable investments you can easily make in today's financial markets.

With that said, let's look at the Strangle. The Strangle, like the Straddle, consists of two options. In the Strangle, however, the two options are not at-the-money options of the same strike (Straddle), but out-of-the-money options (both a call and a put) of different strikes.

The Strangle features one position (either long or short) and two options: an out-of-the-money call and an out-of-the-money put. When you put together a Strangle the construction should be as follows:

Related Writings:
Investment Property Mortgage Loan Comparison Software - Getting the most from your investment is a primary goal of real estate investment. If your property investment loan has a high interest rate and fees, your profit is greatly decreased. Comparing your options can get you the best deal.

- Different options (out-of-the-money call & an out-of-the-money put) - Same stock - Same expiration - One to one ratio

Strangle positions are referred to as 'long Strangle' or 'short Strangle' depending on whether you purchase the call and the put (long) or sell the call and the put (short).

For example, with the stock trading at $57.50, you would construct the long Strangle by purchasing both the July 60 call and the July 55 put. You would construct the short Strangle by selling both the July 60 call and the July 55 put.

It is important to note that the Strangle is a one to one ratio strategy. For every call that you buy (or sell), you must purchase (or sell) exactly one put to properly construct a Strangle.

About the author: Ron Ianieri is currently Chief Options Strategist at The Options University, an educational company that teaches investors how to make consistent profits using options while limiting risk. For more information please contact The Options University at http://www.optionsuniversity.com or 866-561-8227