Straddles and Strangles By: Don Fishback The following is an excerpt from Don Fishback's ODDS Options Wizardry from A to Z A straddle is the purchase or sale of a put and a call of the same month, same underlying market and same strike price. A strangle has the same characteristics with one exception: Different strike prices for the put and call. Straddle Example Assume your analysis indicates that volatility for Dow Jones Index options is very low and you expect volatility to increase sharply. You are not sure if prices will move higher or lower, but want to take advantage of the coming increase in volatility. You decide to buy December 86 straddle but do not want to pay more than 11 per spread for the position. The 86 calls traded last at 4; the 86 puts at 7 ½. To enter an option Straddle Order you would need to provide the following information:
ACCOUNT 12345 As with any multiple-position limit order you may only fill on one or two of the spreads but at a price no worse than 11 per spread. Maximum risk in this example is the amount of premium paid – while the profit potential is unlimited. When liquidating the position the order can go in as a spread or as individual options.
Strangle Example Assume that the S&P 100 Index has been chopping up and down in a range between 480 and 550. Your analysis indicates that the market will remain in that range for several weeks and you decide to take advantage of the situation by selling OEX options on either side of the range. The October 480 puts traded last at 15; the October 550 calls at 10. To enter an option Strangle Order you would need to provide the following information:
Enter the order as follows: ACCOUNT 12345 This position carries unlimited risk while profit potential is limited to the amount of premium received. The order was entered as a spread and must be filled as a spread, although there is no guarantee that both, or either, spread will be filled. If filled, the short options may be covered as a spread or as individual option orders.
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