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Short Strangle
Short Straddle

15. Long Strangle

long strangle

Scenario:

This trader looks at the low implied volatility and feels that options are relatively cheap. The thinking here is that this market will have a very big move. However, the trader is not sure which way it will be, so he decides to buy both a call and a put. The trader saves on premiums by buying both options out-ofthe- money. However, the trader must get an even larger move than a long straddle to make this strategy profitable by expiration.

Specifics:
Underlying Futures Contract: December Euro FX
Futures Price Level: 1.0100
Days to Futures Expiration: 65
Days to Options Expiration: 55
Option Implied Volatility: 11.3%
Option Position: Long 1 Dec 1.0200 Call - 0.0500 ($ 625.00)
Long 1 Dec 1.0000 Put - 0.0048 ($ 600.00)
- 0.0098 ($1225.00)
At Expiration:
Breakeven: Downside: 0.5002 (1.0000 strike - 0.0098 debit).
Upside: 1.0298 (1.0200 strike + 0.0098 debit).
Loss Risk: Losses bottom at 0.0098 with a maximum loss between 1.0200 and 1.0000 strikes.
Potential Gain: Unlimited; gains begin below .9902 and increase as futures fall. Also, gains increase as futures rise past 1.0298.

Things to Watch:

This is primarily a volatility play. A trader enters into this position with no clear idea of market direction but a forecast of greater movement in the underlying futures.


Follow-up Trading Strategies




long strangle: follow-up trading strategies

Short Straddle
Short Strangle

Contents Courtesy of CME.com

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