Long Strangle Options Strategy helps you make unlimited profit with limited loss in trending market even if you do not have clear understanding of direction market will move in. So if you feel market will give big down move or up move then this is the strategy for you. The premium requirement is also less in this case.
It is combination of two strategies we have already discussed. So you need to understand those two for clear understanding of this one. Those two strategies are
Now there are three criteria which should be met to make it Long Strangle. Below are the three criteria which should be clearly met else it will not be efficient
- Buy Out of money OTM Call option
- Buy Out of money OTM Put option
- Both Call and Put options should be of same expiry
- Both the trades should be on same index or stock
This option strategy is similar to Long Straddle with some differences. Both of them can be used in trending market with big moves in either direction. So you need not worry about the direction of move.
You can watch either the English Video or Hindi Video to understand the strategy in details.If you are new to Options trading then I would suggest you to watch or read the Getting Started tutorial on Options . That will help you understand the strategies as well.Below video explains below points in details
- When to use the strategy
- Profit and loss potential of it
- Nifty example to explain the technique
- Margin requirements and difference with other strategies
English Video
Hindi Video
Conclusion
This strategy is particularly useful if you want to invest less amount of money but try to play the big anticipated move which market may give in near term. Since you are not clear if that big move will be in this month or next then this can be one technique you can use. It has very limited loss but can give big profits if movement is big in either direction (typically in market melt down this can be jackpot kind of trade).
The difference it has with vanilla Put buy is that you are prepared for any big up move as well. So post corona people do not predict big move upwards in those cases vanilla put will not make money but this one will reap dividends.So you need not worry about directional movement of the stock or index. You should only worry about big movement in it and that helps you make profit. If there is no big move in either direction you will make loss as well.
This technique is limited loss but high profit one which needs to be exercised on days or before the big day if you are expecting any big movement in either direction. The loss can be minimized if you are buying far Out of money options but that will require big move. So it is trade off between big move in either direction and loss you are willing to take in absence of it. So you need to weigh in the pros and cons of it before applying.
You can also consult the high volatile stocks based on last 15 years data to help you select the stocks for this strategy. These stocks give big move on either side compared to other stocks. So selecting high volatile stocks are perfect choice for this strategy.