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Long
Strangle
A Long
Strangle is used when an large move is anticipated in a
stock price, but it's unknown as to which direction the
stock might move. It's often used around earnings
announcements. Traders think that if a company beats their
earnings expectations the stock will rocket upward, but if
the miss the number then it will really take a hit and
drop drastically.
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Strategies
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Long
Strangle
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Component
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Buy
lower strike price put, buy higher strike price
call of the same month
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Potential
profit
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-
When
the stock price is below the lower break-even
point, substantial and equals to lower
break-even point minus stock price
-
When
stock price is above the upper break-even
point, unlimited and equals to stock price
minus upper break-even point
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Maximum
loss
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Total
premium paid
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Time
value impact
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Negative
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Break-even
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Compared
with Long Straddle, Long Strangle is less
expensive to establish but requires higher market
volatility to be profitable.
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Example:
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Component
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Buy
ABC Jan $180 Put, pay $5, and buy ABC Jan $200
Call, pay $10
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Net
Premium
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Pay
$5+$10=$15
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Break-even
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-
Lower:
$180-$15=$165
-
Upper:
$200+$15=$215
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Profit
when
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Stock
price is below $165 or above $215
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Potential
Profit
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-
When
the stock price is below $165, $165 - stock
price
-
When
the stock price is above $215, stock price -
$215
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Potential
Loss
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$15
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Time
Value Impact
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Negative
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