What Should Investors Know About Strangle Options?

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What Should Investors Know About Strangle Options?

Strangles operate by letting investors profit from their guesses about whether a stock’s price will change, no matter what direction it moves. Like other options strategies, strangles give investors the option to produce additional income from their holdings. Executing a strangle involves buying or selling a call option with a strike price above the stock’s current price and a put option with a strike price below the current price. Most options contracts involve 100 shares of the underlying stock.

The difference between long and short strangles

Short strangles let investors profit when a stock’s price is stable. Investors using a short-strangle strategy sell call options with strike prices above the current share price, and put options with strike prices below the current share price. Suppose the stock’s price stays between the strike prices of the options, the investor profits. If it rises or falls outside that range, investors may lose money. Usually, profits are higher when the difference between the two strike prices is smaller.

Long strangles let investors profit when the stock’s price is more volatile- meaning, the more the price changes, the higher the potential profits from a long strangle. A long strangle lets investors earn a profit when a stock’s price experiences a significant increase or decrease without predicting the direction of the change. Investors using this strategy buy call options with strike prices above the market price and buy put options with strike prices below the market price. If the share’s price remains between the two strike prices, the investor loses the money they spent on the options. If the stock price rises above the cost of the call, they can exercise the option to buy shares below market value. If the price falls below the strike price of the put option, they can buy shares at market price and exercise the put to sell them for a profit.

The Pros to strangle options include:

  1. You can profit from predicting whether a stock’s price will change significantly or remain within a small band, independent of the direction it moves.
  2. Selling short strangles lets investors earn income from the premium payments.
  3. Investors can trade strangles without owning the underlying shares.

The Cons to strangle options include:

  1. With a short strangle, losses can be unlimited as the price of a share can rise by an unlimited amount
  2. Options strategies can be complex, especially those that involve multiple linked options.
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