Strangle Option Trading
Long Strangle - A delta neutral strategy best placed in a highly volatile market at a time when volatility is low and where you anticipate a sharp volatility increase. Purchase an equal numbers of OTM Puts and Calls with 45 days or more until the same expiration date.
This strategy is similar to a Straddle. It is less expensive to open, but has further out break-even prices.
Entry Rules
Price Consolidation usually visible as a Triangle Formation and tightening Bollinger Bands on a stock chart.
Cheap options - Low Implied Volatility compared to Historical Volatility
Additional Criteria that improve probability of success:
Scheduled earnings announcement or upcoming event.
History of price movement with news or earnings announcements.
Buy 3-4 weeks before announcement when option prices are low, because option prices go up as the announcement date gets closer due to increased volatility, even without the stock price changing.
Exit Rules
Exit 30 days prior to expiration if there has been no movement in the underlying asset.
Exit just before or after the earning announcement, depending on the history of the stock’s movement on prior earnings announcement dates. If a stock has made a good move in anticipation of the news, consider getting out of the profitable option the day before. Many times the stock will move in the opposite direction, no matter what the news is because people are ‘buying on the rumor, and selling on the fact’.
Exit at a profit target of 50% of the entire trade (debit – the cost of the Call + Put).
Exit if there is a big move in the underlying asset soon after you enter the position, even if the date for the ‘news’ has not happened yet.
Profit & Loss Calculations
Maximum Risk – Limited to the net debit paid
Maximum Profit – Unlimited to the upside and downside beyond the breakeven prices
Upside breakeven – Call strike price + net debit paid
Downside breakeven – Put strike price - net debit paid
|
