10 rules for using technical indicators
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The long strangle is a very straightforward options trading strategy that is used to try and generate returns from a volatile outlook. It will return a profit regardless of which direction the price of a security moves in, providing it moves significantly. It's a very popular strategy, largely due its simplicity and relatively low upfront cost. There are only two legs in the long straddle: So it's easy to understand and the commission costs aren't too high.
It's a good strategy for beginner traders, and we have provided full details on it below. The long strangle is classified as a volatile options trading strategy, because it's used to make profits out of substantial price movements, regardless of the direction of those movements. It's a strategy that is best used if you a confident that the price of a security will move significantly in one direction or the other, but cannot predict in which direction.
This strategy has limited risk, it's easy to understand, and it only requires a low trading level with a broker, which makes it ideal for traders that are relatively inexperienced as well as veterans. The long strangle, which is also commonly known just as a strangle, is a simple options spread that requires placing two orders with your broker. You need to buy calls on the appropriate security and buy the same amount of puts on the same security. The transactions should be made at the same time, and you should use options contracts that are out of the money.
You can determine how far out of the money you want these contracts to be, but it's generally a good idea to buy ones that are only just out of the money. You should ensure that the strikes of the two legs are equidistant from the current trading price of the underlying security. The long strangle is a debit spread, so there's an upfront cost involved. You can keep the cost down by buying contracts that are close to expiration, but this will allow less time for the price of the underlying security to move.
Buying contracts with more time until expiration will be slightly more expensive, but it will give you a greater chance of making a profit.
We provided an example below of how you might use a long strangle. We have used hypothetical prices instead of real market price, for the sake of simplicity, and also ignored commission costs.
The long strangle can potentially return unlimited profits if the price of the underlying security makes a sizable move in either direction. When a big move happens, then one of the legs will return a substantial profit while the other leg will cost you only the amount spent on the options.
Providing the profits of one leg are larger than the loss of the other, the spread will make an overall profit. If the underlying security doesn't move in price, or only moves very little, then it will return a loss.
Below we have provided some illustrations of what the results of our example would be, depending on the price of the underlying security Company X stock at the time of expiration. In addition, we have shown the formulas that can be used for calculating the potential profits, losses, and break-even points.
You can close your position at any time prior to expiration if you want to by selling the options owned. This could be to realize any profits that have already been made or to recover the remaining value of the options, if you feel like the price of the underlying security isn't going to move enough to return a profit.
The long strangle is a simple strategy that represents a great way to try and profit from significant price movements in either direction. With only two transactions involved the commissions are reasonably low and the relevant calculations are fairly straightforward. There's the potential for unlimited profit, while losses are limited.
This is easily could be a strategy that can be used by beginner traders. Long Strangle The long strangle is a very straightforward options trading strategy that is used to try and generate returns from a volatile outlook.
Section Contents Quick Links. When to Use a Long Strangle The long strangle is classified as a volatile options trading strategy, because it's used to make profits out of substantial price movements, regardless of the direction of those movements.
How to Use a Long Strangle The long strangle, which is also commonly known just as a strangle, is a simple options spread that requires placing two orders with your broker. This is Leg A. This is Leg B. Summary The long strangle is a simple strategy that represents a great way to try and profit from significant price movements in either direction.
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