What is Long Strangle? The Benefits & How to Use It

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Synopsis:

Among options trading strategies, the long strangle reflects a potentially lucrative and versatile trading approach and is worth knowing.

Options trading cannot be learned overnight, but with study and the use of certain strategies, traders can make potential gains. Among options trading strategies, the options strangle is used by traders in certain situations to capitalise on opportunities to make possible profits. In F&O trading, the long strangle is particularly useful for traders when they are trading in markets where there is uncertainty and volatility. Traders make use of many strategies to make trading as profitable as possible in short periods. Consequently, it’s useful to know about different trading strategies, like the long strangle, and when they can be applied.

Article Highlights

The article that follows delves into the long strangle trading strategy and its nuances and stresses the following:

  • What is the long strangle?
  • How to Use the Long Strangle
  • The Benefits of the Long Strangle

What is the long strangle?

A long strangle is a strategy used in options trading that traders use when they expect significant movements in the price of an underlying asset, but are uncertain about the direction in which the movement will go. The strategy has to do with buying a call option and a put option that have the same dates of expiration but differing strike prices. Regarding the call option, the trader is allowed to gain a profit from prices that move upward, while the put option offers the trader a potential profit if prices fall. The clue to using a long strangle effectively is when there is a chance of market volatility. The long strangle strategy tends to thrive when the market experiences radical swings in prices, the strategy provides benefits from a security’s fluctuation in any direction.

In order to make a profit, traders require the price of an asset to move substantially above the cost of both options taken together. Nonetheless, the potential for any loss is restricted to the original investment that was made in both options.

How To Use the Long Strangle

In F&O trading, knowing how to use the long strangle is as important as knowing when to use the approach. While investors learn how to use the long strangle strategy, they will automatically grasp when the strategy is applied as this strategy focuses on certain market conditions. Here is how you can use the long strangle in trading:

  • Select an Underlying Asset

Before you trade in options contracts, you must choose an underlying asset to invest in. This could be an individual stock or an index like the Nifty 50. Make sure these assets are those in which you know there will be price fluctuations but you remain uncertain about the direction of shifts in price.

  • Choose Call and Put Options Strike Prices

Pick OTM or out-of-the-money strike prices for both options - call and put - and ensure they are at a distance from the present asset price to permit a significant price shift in any direction.

  • Calculate the Strategy’s Total Cost

When you calculate the total cost of the long strangle strategy, you have to consider the combined expense of buying both the put options and call options, including commissions and fees incurred, to evaluate the initial investment.

  • Set Up Orders So You Can  Execute the Long Strangle

Setting up orders deals with placing buy orders for the chosen put and call options, stipulating expiration dates as well as strike prices, and ensuring that there are proper funds present in your brokerage account for the execution of the trade.

These steps are vital if you are to establish a long strangle position effectively. Close attention to strike prices and other expenses, and proper planning and execution are the keys to making the most of the strategy’s potential.

The Benefits of the Long Strangle

The long strangle options strategy offers various perks to investors, mainly when they predict a fair amount of volatility in the underlying asset’s price but are not certain about the price movement direction.

Here are some of the prominent advantages of using the long strangle:

  • Volatility and Profit

The long strangle has a positive effect in volatile markets as it lets traders profit from substantial price swings, irrespective of the underlying asset falling or rising sharply in price. Such flexibility makes the strategy effective during certain events such as product launches or earnings reports, where significant price fluctuations may be estimated.

  • Risk is Limited

The long strangle strategy offers limitations in risk, as the most potential loss is limited to the total of the premiums paid for the call and put options. This translates to traders having a well-managed level of exposure to risk. In this sense, this is a controlled approach where the worst outcomes may be known beforehand.

  • Unlimited Potential for Returns

The long strangle enables the unlimited potential to make profits, as it permits traders to make the most of strong price swings regarding the underlying asset.

  • Low Capital Investment

In terms of the cost-effectiveness of a trading strategy, this is an approach with a cost-effective nature to take advantage of greater price volatility. The strategy deals with lower capital investment relative to the purchase of the underlying asset. The only investment that traders make is to pay for the premiums for put and call options. Consequently, the strategy offers access to a wide strata of traders.

  • Diversification

The long strangle strategy gives you the chance to diversify your options portfolio. Using this strategy with other options trading strategies affords diversification and hedges risk.

The Long Strangle For Trading Gains

When traders want a valuable tool that helps them to manage their risk in options trading, they may undertake the long strangle approach. A strategy that brings flexibility and affordability to the trading floor, this approach is popular with many day traders who want to capitalise on sharp price shifts in the market.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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