Keep hearing about strangles in trading discussions but not sure what they actually are.
I’ve seen people mention them when talking about options, but the explanations I found online are confusing. How do they work exactly and when would you use one?
Trying to learn more strategies beyond basic calls and puts.
Long strangles profit from significant stock movement. If the stock stays within strike prices, both options lose value, resulting in a total premium loss.
Strangles involve buying a call and put with different strike prices. They’re good for big moves.
Blew $300 on my first strangle because I had no clue time decay would kill both options.
You buy a call above current price and a put below it. The stock has to move far enough to cover what you paid for both.
Best time is right before earnings when you’re expecting a big move but don’t know which way it’ll go.
A strangle means buying both a call and put on the same stock, but with different strikes. Set the call above the current price and the put below it. You profit if the stock moves significantly in either direction. This strategy works well for earnings reports or news events that might cause volatility. Just keep in mind that for it to be successful, the stock needs to move enough to cover the cost of both options; it won’t work well in flat markets.
It’s like betting on volatility instead of direction. Many traders lose because they fail to see how far the stock needs to move.
Your break-even points are the strike prices plus or minus what you paid in premiums. If the total premium is $5, the stock must move at least $5 past either strike for profit.
Volatility crush after earnings can impact gains, even if the prediction on direction was correct.