How to strangle with options
You know that the stock will move (earning announcement, interest rate moves, news, lawsuit etc) but you are not sure where?! Why not use option strategy called STRANGLE. You buy equal number of put and call options - for the same months of the same stock just with DIFFERENT strike prices . If there are large movements in the price of the stock - so large that the winning side covers losses of the losing side plus brings in some profits, you are laughing all the way to the bank. If the price of shares does not move i.e. stays in between both strikes- you lost the whole position. You don't care where the stock will go as long as it moves a lot within your option time frame!
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Things You'll Need
- online option brokerage account
- experience in option trading with simple positions (straight call and put)-check our option series at weHow
- money on trading account (it varies but for non volatile stocks $3K-$5K on average is plenty for one position, could be less or more, your pick)
Instructions
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1
Pick a fairly volatile stock that has history of strong movements after anouncement.
Make sure that there is some significant event coming for the company that will cause the volatility (news, earnings, lawsuit, buyout, merge etc.) -
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Pick the strike prices for call and put options. For example if the stock is trading around $31.5, possible pick would be CALL@32.5 and PUT@30 for the same expiration months.
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3
Buy equal number of puts and calls.
Some brokers have one order for both "legs" call and put
You can exit indepenently when one side has broke out.
When your option reaches the projected target value , sell the winning options and losing, too. -
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Some people just sell the wining side (if it is profitable enough to cover both side expences and bring in some profit) and leave the losing side until the end in hope it will recover by the expiration, since they have reached the goal. Sometimes (rarely) both sides could bring in the profit in a see-saw action of the stock..
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Tips & Warnings
Learn as much as you can about options and terminology
do not get too big of a "gap" between the strike prices
pick stock that has history of sudden, big moves after the announcement
if you reach the target price- sell before the expiration
you can lose both call and put side if the stock does not move significantly
do not wait for profits to turn into losses
most people lose money trading options
option trading is extremly risky
