Strangle options are a strategy that allows investors to profit when determining whether the stock price is likely to change significantly or remain within a small price range.
Definition of Strangle
Strangle involves using options to profit from predictions on whether the stock price will change significantly or not. Implementing a strangle involves buying or selling a call option with a strike price higher than the current stock price and a put option with a strike price lower than the current price.
How Strangle Works
Strangles work by allowing investors to profit from their guesses about whether the stock price will change, regardless of the direction it will move. Like other options strategies, strangles give investors the option to generate additional income from their holdings, elevate their portfolios, and profit from situations that merely owning shares in a company would not yield them profits.
Types of Strangles
There are two types of strangles: short strangle and long strangle.
Short Strangle
A short strangle allows investors to profit when the stock price does not change significantly. Investors using the short strangle strategy sell call options at strike prices above the current stock price and put options at strike prices below the current stock price.
Long Strangle
A long strangle allows investors to profit when the stock price experiences a significant rise or fall without needing to predict the direction of the change. Investors using this strategy buy call options at strike prices above the market price and buy put options at strike prices below the market price. If the stock price remains between the strike prices, the investor loses the amount they paid to purchase the options.
Strangle vs. Straddles
Strangles and straddles are options strategies that involve buying and selling options in addition to stabilization.
Strangles are designed to allow investors to profit from predictions about stabilization. Investors wishing to use strangles do not need to own the underlying stocks involved in the options contracts they buy and sell.
Straddles are similar in that they involve stabilization. However, they are designed for investors who own shares in a company and wish to hedge against stabilization. They limit potential losses from significant declines in stock price while capping potential profits from significant increases.
Advantages and Disadvantages of Strangles
Advantages
- Profit whether the stock price rises or falls.
- Generate income from the short strangle strategy.
- No need to own shares in the underlying company.
Disadvantages
- Unlimited loss potential for the short strangle.
- Complexity of the strategy may make it difficult to implement.
What This Means for Individual Investors
Strangle strategies are complex, but they are accessible enough for advanced individual investors who should be able to use them. If you feel confident in your ability to predict significant fluctuations in stock price or stabilization, a strangle gives you a way to profit from those predictions.
If you are not confident in your ability to predict stock price fluctuations, other investment strategies may be a better option for you.
Key Takeaways
- Strangle strategies allow you to profit from your predictions about stock price changes, regardless of the direction of the change.
- Long strangles are used when you believe the stock price will change significantly, while short strangles are used when you believe the stock price will remain stable.
- Short strangles carry unlimited risk due to the lack of a technical limit on how high the stock price can go.
Source: https://www.thebalancemoney.com/what-is-a-strangle-options-strategy-5196160
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