When learning to trade stock options, you may feel overwhelmed with the number of trading strategies available. One of the most common strategies is the long strangle. Perhaps, you are reviewing option strategies and looking for more information. This article will discuss long strangles and how to successfully trade them.
Long Strangle Defined
A long strangle trade involves the purchase of a call option and a put option with the same expiration date and the underlying stock. The strategy primarily consists of a trader purchasing an out-of-the-money call option and put option with the same expiration date. The reasoning behind this strategy is that the underlying stock will make a significant move in price, but the trader doesn’t know which direction it will go. The trader essentially longs the underlying stock by buying both the call and put option. This strategy is best employed when a stock trader believes the stock will make a significant move, but doesn’t know which direction it will go.
The strike prices of the two options will differ, with the call being bought at a higher strike price than the put. This inconsistency gives the trader some flexibility regarding how much movement in the price they expect from the underlying asset.
The long strangle strategy is a high-risk, high-reward trade. The potential profit from this trade is unlimited, as long as the underlying stock makes a significant enough move in price. However, if the stock goes sideways and does not move in a clear direction, then a loss could occur. The possible loss is limited to the premium paid for the options unless the trader decides to place a stop loss to limit the risk on the trade.
This trade is best suited for traders confident that the underlying stock will make a significant move, but don’t know which direction it will go.
The long strangle is a relatively cheap trade because you only buy two options. However, it can still be risky if the price doesn’t move as much as you expect. Traders who trade the long strangle only trade it when there is news around significant events, such as earnings, market, or industry reports.
Trading the Long Strangle
Here are the steps to trade a strangle from thinkorswim.
1. Open up the thinkorswim trading platform. Navigate to the ‘Trade’ tab.
2. Provide the underlying stock ticker in the box.
3. Expand the Option Chain. Change ‘Single’ to ‘Strangle’
4. Select the Expiration Date and the Strike Price. Double-click the ‘Ask’ price to begin the order process.
5. Review the order to ensure you purchase both a call and a put.
6. Select the Order Type (Market, Limit) and Quantity. Select Confirm.
7. Select Confirm and Send.
8. Review the details and select Send.
Long Strangle Strategy Tips
#1 – Review Premium Paid – One of the critical things to remember when trading a long strangle is that you are effectively buying two options, so you need to be aware of the premium you are paying for both options. This can impact your overall profit or loss from the trade. An excellent time to trade this is right before the volatility rises, so you can pay less in premium.
Also, remember that, because you are buying two options, there is the potential for losses to mount up quickly if the underlying asset doesn’t move in the expected direction.
#2 – Check Market Conditions – The best market conditions for a long strangle are when there is high implied volatility. This means that the options you are buying are expensive, but it also means that there is a greater chance for a big price move.
#3 – Look for Major Events – Another good time to use a long strangle is when you expect a major event to happen that will move the price, but you are not sure the direction it will go. This could be an earnings report, a significant announcement from the company, or anything else that could cause a significant price move.
#4 – Be Picky About Your Strike Prices – When trading a long strangle, one of the most important things is to choose the correct strike prices for the call and put options. The goal is to select strike prices far enough apart so that there is a good chance that one of the options will be in the money at expiration. However, you don’t want the strike prices to be so far apart that the net premium paid for the options is too high.
#4 – Manage Your Risk – Another essential tip for trading a long strangle is carefully managing your risk. This strategy can be risky because you are effectively buying two options. Therefore, it is important to set stop-loss orders on both the call and put options. Stop loss orders help you limit your losses if the stock price does not make the major move as expected.
#5 – Do Your Research – If you are considering trading a long strangle, then it’s essential to do your research and ensure you understand all the risks involved. This is not a trade for everyone, and it’s important to ensure that you are comfortable with the risks before entering any trading positions.
#6 – Check Volatility -Finally, it is important to keep an eye on the implied volatility of the options. This is because long strangles tend to do best when implied volatility is high. Therefore, you may consider buying long strangle options with increased market uncertainty.
If you are still interested in trading the strategy, be sure to do your research and practice with a demo or paper trading account before putting any real money on the line.
Another thing to remember is that your long strangle will expire worthless if the market doesn’t move enough. This is why it’s essential to consider the market conditions before entering strangles.
Following these tips can help ensure some level of success when trading long strangles. However, remember that this strategy does come with some risks. Therefore, you should only trade long strangles if you are comfortable with the risks involved.
Summary: Trading a Long Strangle
Overall, a long strangle can be a great way to take advantage of market movement when you just don’t know which direction the market will move. Just be sure to consider the market conditions before implementing this strategy. This trade may not work well for every trader, but can be a great way to profit from a significant price move.
Maurice Kenny has helped over 600 people become financially free through one-on-one coaching, mentorship, and options trading strategy. Many of these new traders are now full-time traders, and they all started by watching his 1-hr webinar.
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