"The fact that we provide multiple clearing relationships with several FCMs represents tremendous value to every customer and prospect. This provides flexibility not available from most of the street, including the FCMs themselves. You have more open doors with Daniels Trading."
– Glenn Swanson
President
15. Long Strangle
MENU - Futures Strategy Guide
Contents Courtesy of CME.com
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
MENU - Futures Strategy Guide
Contents Courtesy of CME.com