Home/Blogs/Understanding Strangle Options Strategies

Understanding Strangle Options Strategies

derivatives tradingfuture and optionsfutures and options trading
Published Date: 26 Sep 2023Updated Date: 10 Jan 20256 mins readBy MOFSL
 Strangle Options

Introduction

The Strangle Option, often referred to simply as the Strangle, is a powerful trading strategy used in the world of options trading. It's designed to take advantage of market volatility by buying a call option and a put option simultaneously, which have the same expiration date but at different strike prices. This unique approach allows traders to profit from significant price movements in either direction, making it a valuable tool in a trader's arsenal.

Before delving deeper into the Strangle Strategy, it's crucial to understand the role of volatility in options trading. Volatility measures the degree of price fluctuations in an underlying asset. Higher volatility typically leads to higher option premiums, which can benefit Strangle traders. Now, let's explore the basics.

Open Trading Account and Start Trading!

Components of a Strangle Strategy

To grasp the Strangle Strategy fully, it's essential to revisit the fundamentals of call-and-put options. A call option gives the holder the right (but not the obligation) to buy an underlying asset at a specific strike price, while a put option grants the right to sell at a predetermined strike price. Understanding these two key components is crucial when constructing a Strangle.

Long Call Option: The long call option involves purchasing a call option on the same underlying asset, with the same expiration date as the put option. However, the call option has a higher strike price than the put option. This means you have the right to buy the asset at a higher price.

Long Put Option: The long put option is the second part of the Strangle. It involves buying a put option on the same underlying asset, with the same expiration date as the call option. However, the put option has a lower strike price than the call option, granting you the right to sell the asset at a lower price.

How Does the Strangle Strategy Work?

Now that we've covered the basics, let's explore how the Strangle Strategy actually works in practice. The primary goal of this strategy is to profit from substantial price movements in either direction, which often occurs after periods of low volatility or before significant market events. The beauty of the Strangle Strategy is its versatility. It can generate profits in three different scenarios: when the market goes up significantly, when it goes down considerably, or when it experiences high levels of volatility. However, it's important to note that it comes with risks, including the potential for losses.

Conclusion

In this comprehensive guide, we've explored the basics of the Strangle Option (Strangle Strategy). Whether you're a novice looking to venture into options trading or an experienced trader seeking to expand your trading strategies, the Strangle Option strategy can offer you a unique and powerful approach to navigating the ever-changing financial markets.

 

Financial Calculators: Compound Interest Calculator | EMI Calculator | SIP Calculator | SWP Calculator | RD Calculator | NPS Calculator | PPF Calculator | Mutual Fund Returns Calculator | Inflation Calculator

 

Popular Stocks: ICICI Bank Share Price | HDFC Bank Share Price | CDSL Share Price | UPL Share Price | TCS Share Price | BHEL Share Price | Trident Share Price | IRFC Share Price | Adani Power Share Price

 

You may also like…

Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
Open Demat Account
I wish to talk in South Indian language
By proceeding you’re agree to our T&C
Click here to see your activities