Practice with our free options trading demo account here: http://bit.ly/Q72dYG For more of our free introductory options course, go here: http://www.informedtrades.com/f115/ VIDEO NOTES Hello and welcome, In this video, we will look at the Long Strangle trade. A Long Strangle is similar to a Long Straddle. You may remember from my video on Straddles that a Long Straddle is a trade that combines two options on the same stock, a Long Call and a Long Put, both with the same Strike Price and time of expiration. Like the Straddle, a Long Strangle is a trade that combines two Options on the same stock, a Long Call and a Long Put, both with the same time of expiration. However, for a Straddle, the trader buys options that are at the money, and with a Strangle, the trader buys two options that are out of the money. Like a Long Straddle, the Long Strangle trade is taken when the trader feels that the price of the stock will make a significant move in price before the Options expire, but the trader is unsure of which direction the price will move. The goal is that the price of the underlying stock moves enough in one direction, that the profit from one Option exceeds the loss on the other Option, resulting in a net profit on the trade. Comparing the Long Strangle to the Long Straddle- A long Straddle involves buying two options that are 'at the money.' In other words, the trader buys both a Call Option and a Put Option with Strike Prices that are as close to the current price of the stock as possible. A long Strangle involves buying two options that are 'out of the money.' In other words, the trader buys a Call Option with a Strike price that is above the current price of the stock and a Put Option with a Strike Price that is below the current price of the stock. A Long Strangle costs less up front. Buying 'out of the money' options cost less than options that are 'at the money.' In other words, it costs less to place a Long Strangle trade than it does to place a Long Straddle trade. However, the price of the underlying stock has to move more for the Long Strangle to be profitable. So the lower cost is directly offset by a lower probability of the trade being profitable. Let's look at an example of 2 choices of a Long Strangle a trader could place on SLV, the silver ETF. At the time of making this video, SLV is currently priced at $20.65 per share. A trader could place a Strangle by buying a Call Option with a $21.00 Strike for 58 cents, and buying a Put Option with a $20 Strike for 40 cents, for a total cost of 98 cents a share up front. These options are only slightly out of the money. Both options cost 98 cents up front total, so for the trade to be profitable, the Price of SLV has to either rise more than 98 cents over the $21.00 Call Strike, or the price of SLV has to drop more than 98 cents below the $20.00 Put Strike. In other words, for the trade to make money, the price of SLV has to either rise over $21.98 or fall below $19.02. Another choice would be for the trader to buy Options that are further out of the money. The trader could choose to place a Strangle by buying a Call Option with a $21.50 Strike for 40 cents, and buying a Put Option with a $19.50 Strike for 27 cents, for a total cost of 67 cents a share up front. Both options cost 67 cents up front total, so for the trade to be profitable, the Price of SLV has to either rise more than 67 cents over the $21.50 Call Strike, or the price of SLV has to drop more than 67 cents below the $19.50 Put Strike. In other words, for the trade to make money, the price of SLV has to either rise over $22.17 or fall below $18.93. Comparing the two examples for a Strangle- if the trader buys the $21 Call and $20 Put, the total cost is higher at 98 cents, but the price of SLV does not have to make as much of a move for the trade to be profitable, so there is a higher probability that the trade will make money. If the trader buys the $21.50 Call and $19.50 Put, the total cost is lower at 67 cents, so this Strangle costs about 1/3 less up front than the other example, but the price of SLV has to move more for the trade to be profitable, meaning that there is less probability that the trade will make money. Furthermore, as one chooses options for a Strangle that are further 'out of the money,' the total cost up front- in other words, the total amount risked decreases. However, amount that the underlying stock has to move increases, so the lower cost is offset by a lower probability of the trade being profitable. So that is the Long Strangle. I hope that you enjoyed this video. Thanks for watching.
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Duration: 4m 48s
Rating: 20