15. 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
