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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