Knowing when to invest and how to invest in it can be tricky-even for the experienced investor. When it comes to options trading there are a myriad of strategies that can be used. In our previous articles, we covered common basic strategies, income strategies, iron condors, butterflies and straddles used in options trading.
In this article, we take a general look and will explain the difference between long and short strangles and explore what benefits and risks these strategies present to the investor.
Strangles
A strangle involves purchasing or selling a call and a put with different strike prices but the same expiration. The two types of strangles-long and short are described below.
Long Strangle
Setup: Buy one call and one put with the call’s strike price above the put’s strike price. To do this, the trader does the following:
Buys an out-of-the-money (OTM) call option (strike price above current market price).
Buys an out-of-the-money (OTM) put option (strike price below current market price).
Objective: Profit from a significant price move in either direction.
Market view: Expecting high volatility but less confident in the direction.
Max gain: Unlimited (for large price moves).
Max loss: Limited to the premium paid for both options.
Benefit: This strategy can be cheaper than a long straddle and profits from large price movements in either direction.
Risk: Using this strategy requires a more significant price move than a straddle to break even. There is also a risk of losing the entire premium if the market doesn’t move.
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Short Strangle
• Setup: Sell one call and one put with the call’s strike price above the put’s strike price (sell an OTM call option and sell an OTM put option).
• Objective: Profit from low volatility and price stability.
• Market view: Expecting low volatility and little price movement.
• Max gain: Premiums received.
• Max loss: Unlimited (if the price moves significantly).
Benefit: Gains from time decay and low volatility.
Risk: Unlimited risk for large price moves. Using this type of strategy requires strong risk management.
Summary table of strangle strategies.
Always know that any investing carries risk and if you aren't sure about something it's best to speak to a financial adviser.
Strategy | Market View | Risk | Reward | Key Feature |
|---|---|---|---|---|
Long Strangle | High volatility | Limited | Unlimited | Cheaper than straddle, needs larger moves. |
Short Strangle | Low volatility | Unlimited | Limited | Wider range than straddle. |
To practice your options trading, Tiger Trade offers a free demo account where users can explore strategies and opportunities without risk to real capital. Once you are comfortable with your strategies and want to look into diversifying your portfolio you can trade with 4 x zero monthly brokerage for options, US or ASX stocks or ETFs*.
*New clients & unfunded existing clients only. Only min. brokerage waived for 4 ASX, US stocks or options trades. Third-party fees and other fees still apply. See T&Cs for details.
Please note that not all option strategies are available on Tiger Trade, however, have been included for education purposes.
Capital at risk. Options trading carries a high level of risk and may not be suitable for all investors. You should only trade with money you can afford to lose. See FSG, PDS, TMD and T&Cs via our website before trading. Information provided may contain general advice without taking into account your objectives, financial situations or needs. Past performance is no guarantee of future results. Graphics and charts are for illustrative purposes only. Tiger Brokers (AU) Pty Limited. ABN 12 007 268 386 AFSL 300767
