Monday, October 1, 2012

STRANGLE STRATEGIES Long Strangle (Buy OTM Call + Buy OTM Put)


STRANGLE STRATEGIES

Long Strangle (Buy OTM Call + Buy OTM Put)

Short Strangle involves the simultaneous buying of a slightly out-of-the-money (OTM) put and a slightly out-of-the-money (OTM) call of the same underlying and expiration date. Strangle strategies are suggested over straddle because strangle is low cost strategy.

Market Scenario: Neutral (Movement is Range Bound)

Risk: Limited to net premium paid
Reward: Unlimited
BEP:   UPPER BEP: Call Strike + Net Premium
            LOWER BEP: Put Strike – Net Premium
EXAMPLE:
Entry:
SPOT
5000


STRIKE
PREMIUM
BUY CALL
5100
50
BUY PUT
4900
40

UPPER BEP: 5100 + 90 = 5190                                LOWER BEP: 4900 – 90 = 4810
On Exit if:
SPOT
CALL PAY-OFF
PUT PAY-OFF
STRATEGY PAY-OFF
4700
-50
160
110
4800
-50
60
10
4810
-50
50
0
4900
-50
-40
-90
5000
-50
-40
-90
5100
-50
-40
-90
5190
40
-40
0
5200
50
-40
10
5300
150
-40
110


Long Strangle - Strategy Pay-Off




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