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Long Strangle Strategy

Strategy Type:

Long Strangle is a speculative strategy. It's employed when an investor anticipates significant price volatility in the underlying asset but is unsure about the direction of the price movement.

Components: The strategy involves two main components:

  • Long Put Option: The investor buys an out-of-the-money call option with a specific strike price.
  • Long Call Option: Simultaneously, the investor buys an out-of-the-money put option with a different strike price. The put strike is typically below the call strike.

Profit and Loss Potential:

  • Maximum Profit:The maximum profit is potentially unlimited on the upside, as the call option can benefit from a substantial price increase. On the downside, the maximum profit is limited to the difference between the strike prices of the options.
  • Maximum Loss:The maximum loss is limited to the total premium paid to purchase both the call and put options. This loss occurs if the underlying asset's price remains within the range defined by the strike prices.
Break-Even Point: There are two break-even points based on the specifics of the options used. These points can be calculated based on the strike prices of the options.

Strategy Goals:

  • The primary goal of a Long Strangle is to profit from significant price movement in the underlying asset, regardless of the direction. The strategy benefits from price volatility.
  • The strategy is suitable when an investor expects a significant event or announcement that could lead to a sharp price move in the underlying asset.

Risk Management:

  • The risk is limited to the premium paid to purchase both the call and put options. This defines the maximum loss.
  • The strategy offers potential for unlimited profit on the upside, which can help offset potential losses.