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Ten Reasons – Trading Long Option Strangles

A long strangle is long one call at a higher strike and long one put at a lower strike in the same expiration and on the same stock. Such a position makes money if the stock price moves up or down well past the strike prices of the strangle. There are higher costs and risks with these strategies, as I discuss below. 

 Strangles are low risk plays, one side of the options will go up in value when the other side goes down in value the majority of the time.

  1. If one side becomes worthless it generally means the other side is worth a lot.
  2. You can make money on strangles even when you do not know which way the market will move.
  3. It is much less stressful to hold a position with a hedge in place.
  4. The big risks are transferred from the option buyer to the option seller in this play.
  5. Strangles lose small  with small movements but win big when there is a big move. The are asymmetrical in their construction.
  6. When one side of the option sellers blow up their account due to an outsized move you will be on the other side of them and be the trader their capital flows to.
  7. Strangles can be played on any time frame.
  8. With the strangles the winning side has a growing delta and the losing side has a shrinking delta.
  9. Strangles can be used to capture trends, volatility, and reversals.

Where is the risk? (more…)