Been hearing about strangle options lately but not sure what they actually are.
When would you use this strategy? Is it better for certain market conditions or does it work all the time?
Trying to learn more strategies beyond basic calls and puts.
Works when you expect big moves but don’t know which direction.
Lost $300 learning this the hard way during Apple earnings two years ago.
Bought both sides too close to expiration and got crushed by time decay even though the stock moved 4%. Now I only use strangles when I expect huge volatility but can’t predict direction.
Worked great during that crazy Fed announcement last month though.
Strangles work best with low implied volatility before events. Buy when IV rank is below 30%. Sell when IV exceeds 70%. Aim for 30 to 45 days to expiration to manage time decay effectively.
Most people skip the exit strategy with strangles and that’s where they mess up.
You need the underlying asset to move more than the combined cost of both options just to break even. That means if you paid $50 for the call and $30 for the put, the stock needs to move at least $80 in either direction.
Best times are before major events like FDA approvals or quarterly reports where big moves are likely but direction is unclear.
A strangle involves buying a call and a put option at different strike prices, typically out of the money. This strategy profits from significant price movements in either direction. It’s best used ahead of earnings releases, news events, or times of market volatility when you’re uncertain about direction. The crucial factor is timing; you need a notable move before expiry. However, be aware of time decay affecting both options, which means if the price stagnates, you could lose on both trades. This strategy is effective primarily during strong market breakouts.