Long-Strangle
| Range | Value |
|---|---|
Market expectation | Undirected strong price change |
Construction | Put long with strike price E1 |
Profit potential | Unlimited |
Risk of loss | Limited |
Time effect | Negative |
Volatility effect | Positive |
Market expectation
If you expect price breakouts to the upside or downside and a sharp rise in volatility, a long strangle is a good option.
Construction
A long strangle consists of a call long and a put long with the same maturity. The two options have different strike prices. In the standard case, the put long has the lower strike price, but the statements apply regardless of this. If the two base prices coincide, a long straddle is created.
With base prices further apart, the strangle becomes cheaper, but also more speculative.
Profit potential
The profit potential is unlimited with strongly changing prices. The further the price moves down or up from the selected interval of the two base prices, the higher the profit.
The lower break-even point is the lower strike price minus the sum of the premiums paid, the upper break-even point is the higher strike price plus the sum of the premiums paid.
Risk of loss
The risk of loss of the long strangle is limited. The maximum loss is incurred if the price of the underlying moves between the two strike prices. The further apart these are, the lower the maximum loss.
Time effect
The time value effect is negative, as both positions are purchased and therefore both have negative time effects.
Volatility effect
The volatility effect is positive, as there is speculation on strong price changes and both call longs and put longs react positively to rising volatility.