The Strangle Trade

A strangle trade is similar to a straddle trade, except that the call and put options have different strike prices. The idea is to lower the cost of the trade by using out-of-the-money options. Essentially, this is a more aggressive version of the straddle trade.

Let’s reconsider Example 1, where XYZ is trading around $30 in late May. Now try to play the upcoming events with a strangle trade.

Trade: Buy 1 Aug 35 call for $.80 per share and buy 1 Aug 25 put for $.70 per share.

Cost = $150 [(0.80 + 0.70) × 100 = 150].

Max risk = $150.

See Figure 15-2 for a risk graph that depicts this trade.

Figure 15-2.

This straddle trade is a much cheaper trade than the corresponding straddle trade. A comparison ...

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