Strangle Option Strategy

What are the characteristics of this option strategy?

The Strangle Option Strategy is an advanced option strategy that involves the sale of two option contracts, an out-of-the-money call and an out-of-the-money put, with the same expiration date. This strategy is designed to take advantage of market conditions with limited downside risk and an unlimited upside potential. It is generally a neutral to bearish strategy, since profits are made when the underlying stock or index has limited price movement.

Is this a bullish, bearish or neutral strategy?

The Strangle Option Strategy is generally a neutral to bearish strategy. The maximum profit potential of the strategy is achieved when there is limited price movement of the underlying stock or index.

Is this a beginner or an advanced option strategy?

The Strangle Option Strategy is an advanced option strategy. It requires a thorough understanding of the markets and technical analysis to identify a potential range for the underlying stock or index.

In what situation will I use this strategy?

The Strangle Option Strategy is best used when an investor expects the underlying stock or index to remain flat or move within a narrow range. It is also used when an investor anticipates significant volatility but is uncertain as to the direction of the move.

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

The Strangle Option Strategy typically falls in the mid-low range of risk-reward and probability of profit. It is a low risk, low reward strategy that offers limited but consistent profits over time.

How is this strategy affected by the greeks?

The Strangle Option Strategy is affected by the gamma, theta, and vega of the option contracts. If the underlying stock or index moves in the opposite direction of the option contracts, gamma will increase, theta will decrease, and vega will increase.

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

The Strangle Option Strategy is best used when volatility is in the mid- to low-range. When volatility is high, the chances of the underlying moving in the opposite direction of the option contracts increases, resulting in losses.

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

Adjusting the Strangle Option Strategy when the trade goes against you is relatively straightforward. You can roll out the options to a later expiration date, adjust the strike prices of the option contracts, or close out the trade and take the losses.

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

The Strangle Option Strategy generally requires a higher commission rate than other option strategies due to the sale of two different option contracts. However, the fees are relatively low compared to other options strategies.

Is this a good option income strategy?

The Strangle Option Strategy is a good option income strategy as it offers a consistent stream of income over time. However, the profits are typically limited and not as high as other options strategies.

How do I know when to exit this strategy?

The best way to know when to exit the Strangle Option Strategy is to use technical analysis to identify a potential change in the underlying stock or index direction. Once the change is identified, the strategy should be exited before the underlying stock or index hits the strike price of either option contracts.

How will market makers respond to this trade being opened?

When the Strangle Option Strategy is opened, market makers will typically attempt to “gamma scalp” the trade. This means they will be selling the option contracts in order to close out the trade in the event of an unfavorable price move on the underlying stock or index.

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

A Strangle Option Strategy can be constructed by buying a 40 strike call option and 60 strike put option with the same expiration date. For example, the maximum potential profit for this strategy is the sale price minus the total cost, or $4 – ($6 + $4) = $2. The maximum potential loss is the difference between the strike prices of the two options contracts, or $20 – $40 = $20.

MarketXLS – How Does it Help?

MarketXLS offers a comprehensive suite of tools and resources that can help option traders. The easy to use platform includes a variety of calculators and spreadsheets to help traders manage risk and adjust their trades in real-time. MarketXLS also provides trading alerts, back-testing tools and real-time analytics, helping traders make more informed trading decisions.

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

Short Strangle Option Strategy
Long Strangle Option Strategy
Calendar Strangle
Strap Strangle
Strip Strangle
Short Straddle Option Strategy
Long Straddle Option Strategy
Strap Straddle
Long Put Synthetic Straddle
Strip Straddle
Calendar 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)
Short Strangle Option Strategy
ITM Options: A Strategic Investing Tool
“Maximizing Your Profits with Out of Money Call Options”
Becoming a Pro by Knowing the Option Delta Formula