Continue reading...This week we’ll learn about the Straddle’s first cousin, the Strangle. Let’s start off with a definition.
Definition: A long (short) Strangle is the purchase (sale) of an out of the money (OTM) Put and an OTM Call on the same underlying stock with the same time to expiration. There’s also a similar strategy, called a Guts, where both of the options are ITM.
With XYZ stock trading at $50, an example of a long Strangle would be the purchase of the XYZ July 45 Put and the July 55 Call. If the Call is trading for $1.25, the Put for $.90 and we bought 10 Strangles, the total cost (excluding commissions) would be $2,150. Of course, if we sold the Strangles, we would receive a credit for that same amount coming into our account. Like the Straddles, long Strangles must be paid for in full; they cannot be bought on margin. Short Strangles have margin requirements that will be discussed in a future article.
The following graphs show the profit and loss for both long and short Strangles at...
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