Long Strangle Option Strategy

What are the characteristics of this option strategy?

Long strangle positions buy an out of the money call and an out of the money put on the same underlying, with the same expiration date but different strike prices. The strategy seeks to benefit from a large price move in either direction. Both legs are bought, so the combined premium is the cost of the trade and also the maximum loss, which is lost in full if the stock finishes anywhere between the two strikes at expiration.

Is this a bullish, bearish or neutral strategy?

The long strangle strategy is a neutral strategy. It seeks to take advantage of a large move in either direction in the price of an underlying asset.

Is this a beginner or an advanced option strategy?

The long strangle strategy is an advanced option strategy. It is not for novice traders and should only be used by experienced traders.

In what situation will I use this strategy?

The long strangle strategy is best used when you believe a stock will make a large move, but you don’t know which direction it will go. It works best when implied volatility is low relative to the move you expect, because both legs are paid for and cheap options mean narrower breakevens. When implied volatility is already high the options are expensive, the stock has to travel further to pay for them, and the position is exposed to a volatility collapse once the event passes.

Where does this strategy typically fall in the range of risk-reward and probability of profit?

The long strangle offers a high reward relative to its cost, but the probability of profit is low. Loss is capped at the premium paid for the two options, and that full premium is lost whenever the stock finishes between the strikes at expiration, which is the single most likely outcome. Because both strikes are out of the money, a strangle needs a bigger move than a straddle on the same underlying just to break even, even though it costs less to put on.

How is this strategy affected by the greeks?

The long strangle strategy is affected by the “greeks,” which are the key risk measures associated with option strategies. Delta, gamma, vega, theta and rho are the five greeks that affect the long strangle strategy. Delta measures the sensitivity of an option’s price to changes in the underlying security’s price. Gamma measures the rate of change in delta for a one-point move in the underlying stock. Vega measures the option’s sensitivity to changes in volatility of the underlying security. Theta measures the sensitivity of the option’s price to the passage of time. Rho measures the sensitivity of the option’s price to a one-point move in the interest rate of the underlying security.

In what volatility regime (i.e., VIX level) would this strategy be optimal?

A VIX between 10 and 20 is a low to normal volatility regime, not a high one. That is nonetheless a reasonable place to buy a strangle, because the long call and long put are cheap and the position is long vega, so it gains if implied volatility expands. Buying strangles when the VIX is already elevated means paying up for a move that is largely priced in.

How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?

The usual adjustments are to close the losing leg and let the winning one run, to roll the whole position out to a later expiration, or simply to cut the trade and take the loss while the options still have time value left. Buying more contracts to average down is not an adjustment, it increases the premium at risk and widens the move the stock has to make. This position is moderately easy to adjust, as long as you know how to price options.

Where does this strategy typically fall in the range of commissions and fees?

The long strangle strategy typically has high commission and fee costs, as this strategy requires two different options to be purchased.

Is this a good option income strategy?

The long strangle strategy is not typically used as an option income strategy, since the underlying stock needs to move significantly in either direction in order to make a profit. It is a non directional, volatility strategy: it profits from the size of the move rather than its direction, which is also why it does not work as an income strategy.

How do I know when to exit this strategy?

The long strangle strategy should be exited when the underlying stock moves significantly in either direction. If the stock moves in the direction of the purchase option, the strategy should be exited at a profit. If the stock moves in the opposite direction, the strategy should be exited at a loss.

How will market makers respond to this trade being opened?

Market makers will typically respond positively to the opening of a long strangle, as it usually entails the purchase of both call and put options.

What is an example (with calculations) of this strategy?

For example, let’s say MSFT stock is trading at $277 per share. You decide to initiate a long strangle strategy and buy one out of the money call option with a $285 strike price and an out of the money put option with a $270 strike price. The cost of the two options is $3.05 and $4.00 respectively, so your total cost of the trade is $7.05. If the stock moves up to $295, the call option will be in the money and have a value of $10.00. If the stock moves down to $260, the put option will be in the money and have a value of $10.00. Your total profit from the trade will be $2.95 in either case, $295 on one contract of each. The breakevens are $292.05 on the upside, the $285 call strike plus the $7.05 premium, and $262.95 on the downside, the $270 put strike less the same $7.05. If MSFT finishes anywhere between $270 and $285 at expiration, both options expire worthless and the full $705 paid for the pair is lost. That is the maximum loss.

How MarketXLS Can Help

MarketXLS provides a unique suite of option strategies and calculators including the Iron Condor Excel Template and Short Guts, Long Guts Option Strategy. These resources help traders save time and maximize profits when trading options. With MarketXLS, traders can access real-time market data, calculate risk exposure in fractions of a second, and execute trades in real-time. With all the power of Microsoft Excel, MarketXLS gives traders the tools they need to succeed in the options market.

Here are some templates that you can use to create your own models

Long Strangle Option Strategy
Calendar Strangle
Strip Strangle
Strap Strangle
Long Straddle Option Strategy
Calendar Straddle
Long Put Synthetic Straddle
Synthetic Short Straddle with Calls
Synthetic Short Straddle with Puts
Short Albatross Spread

Search for all Templates here: https://marketxls.com/templates/

Relevant blogs that you can read to learn more about the topic

Long Strangle Option Strategy (Using Excel Template)
Becoming a Pro by Knowing the Option Delta Formula
Benefits of Being Delta Positive
Understand What a Strangle in Options Is
“Maximizing Your Profits with Out of Money Call Options”