O'Reilly logo

The Complete Book of Option Spreads and Combinations: Strategies for Income Generation, Directional Moves, and Risk Reduction, + Website by Scott Nations

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

CHAPTER 8

Strangles

When we discussed straddles in Chapter 7, we described an option combination created by buying (or selling) a put and a call with the same strike price, usually the at-the-money strike price, and with the same expiration. Straddles are pretty expensive because to execute a long straddle you buy the two options that have the greatest amount of time value. If you’re selling a straddle, that’s good news; you’re selling the two most expensive options, in terms of time value, in that expiration month, but you’re pretty much assured of having one of your short options expire in-the-money, meaning you’ll have a position in the stock, a position that you might not want.

If you wanted to make money if the underlying stock experienced a big move but didn’t want to spend as much as a long straddle might cost, or if you wanted even more leverage than a straddle will generate, then you could buy out-of-the-money options; you could buy an out-of-the-money call, meaning that the strike price of the call is above the current price of the underlying stock, and you could buy an out-of-the-money put, meaning that the strike price of the put is below the current price of the underlying stock. This combination of an out-of-the-money call and out-of-the-money put with the same expiration date is a strangle. When buying both options we’re buying the strangle, when selling both options we’re selling the strangle.

A long strangle is a defined risk strategy that you might use when ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required