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15. Long Strangle
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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
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