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  The Strangle ( Other Neutral: Long Straddle - Short Straddle - Short Strangle - Collar - Reversal - Put Ratio Spread

- Long Condor - Short Condor - Conversion - Butterfly - Calendar Spread )

 

Word on Strangles as Neutral Strategies

Although long and short strangles differ in their response to market movement, we have chosen to list both as neutral strategies. In a pure sense, the short strangle is a neutral strategy because it achieves maximum profit in a market that moves sideways. In contrast, the long strangle benefits from market movement in either direction. However, since a $10 move in either direction will have the same impact on profit, the trader doesn't necessarily have a preference which way the market moves. In this sense, the trader is neutral about market direction--as long as movement occurs.

 

Long Strangles

Long strangles are comparable to long straddles in that they profit from market movement in either direction. From a cash outlay standpoint, strangles are less risky than straddles because they are usually initiated with less expensive, near-the-money rather than at-the-money options.

Like long straddles, they have unlimited profit potential on both the upside and downside. For example, let's imagine that a particular stock is trading at $65 per share. The following chart shows where the near-the-money and at-the-money options are trading.

 

Stock @ $65

Strike Price

Calls

Puts

60

7

2.25

65

5.25

5

70

2.50

6.75

 

*Calls and puts used in strangles have the same expiration.

 

Long Strangle

Buy

1 60 Put @ $2.25

$225

Buy

1 70 Call @ $2.50

$250

 

 

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