Strategies

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Weekly Strategy Discussion

The Weekly Strategy Discussion is designed to assist individuals in learning how options work and in understanding various options strategies. Options involve risk and are not suitable for all investors. The strategies discussed are for educational and illustrative purposes only, and should not be construed as an endorsement, recommendation or solicitation to buy or sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.

Speculating with a Strangle

Example:                 XYZ trading at $65 

Outlook:                  You anticipate a significant move either up or down over the next few weeks with hopes of increasing volatility.

Possible strategy:    Buy the Strangle

                                

                                  Buy one 70 strike call at $2.40

                                  Buy one 60 strike put at $2.05

                                                         Net Debit $4.45 ($445)

*All values shown are at the time of expiration. Commissions and other trading fees not included.

Stock

Long 70 Call
Profit/(Loss)

Long 60 Put
Profit/(Loss)

Net Profit
(Loss)

50

($2.40)

$7.95

$5.55

55

($2.40)

$2.95

 $.55

60

($2.40)

($2.05)

($4.45)

65

($2.40)

($2.05)

($4.45)

70

($2.40)

($2.05)

($4.45)

75

$2.60

($2.05)

$.55

80

$7.60

($2.05)

$5.55

 

                                    

At Expiration:

  • Maximum Profit = Unlimited
  • Upside Breakeven = Call Strike Price + Net Debit
  • Upside Breakeven = $74.45
  • Downside Breakeven = Put Strike Price - Net Debit
  • Downside Breakeven = $55.55
  • Maximum Loss = Net Debit
  • Maximum Loss = $445   

In Summary: The Long Strangle has limited risk with unlimited profit potential to the upside and substantial profit potential to the downside.  A profit is possible with a big move in XYZ stock over the next few weeks or a big increase in volatility.  Remember, when volatility increases, both call and put premiums increase as well. 

CBOE Volatility Index (VIX)