19 lines
1.1 KiB
Plaintext
19 lines
1.1 KiB
Plaintext
Long Strangle
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Definition : Buying one call and one put in the same option class, in the
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same expiration cycle, but with different strike prices. Typical long
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strangles involve an OTM call and an OTM put. A strangle in which an
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ITM call and an ITM put are purchased is called a long guts strangle.
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A long strangle is similar to a long straddle in many ways. They both
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require buying a call and a put on the same class in the same expiration
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month. They are both buying volatility. There are, however, some functional
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differences. These differences stem from the fact that the options have
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different strike prices.
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Because there is distance between the strike prices, from an at-expiration
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perspective, the underlying must move more for the trade to show a profit.
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Exhibit 15.8 illustrates the payout of options as part of a long strangle on
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a $70 stock. The graph is much like that of Exhibit 15.1 , which shows the
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payout of a long straddle. But the net cost here is only 1.00, compared with
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4.25 for the straddle with the same time and volatility inputs. The cost is
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lower because this trade consists of OTM options instead of ATM options.
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The breakdown is as follows:
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