How does a Strangle work?

A Strangle strategy can give you high returns with a safety net. Let us assume stock GIY is trading at $41 and there is a news event tomorrow.

We notice history indicates that every news event comes with a big stock movement on this particular stock. The only problem is we do not know which direction the stock will move. There are two strategies we can use.

Either we toss a coin in the air to see if we buy a Call or a Put or we can do a Strangle. What is that you are wondering? This strategy helps us to decide whether to buy a Call or Put by letting us buy both.

Our stock is at $41 we buy a $45 Call for $1 and a $40 Put for $2.5. This means we spent $3.5. Now if the stock has a big move in either direction we will make money. Do you love Stocks yet?

Let me Show You The Money

$5.5(we made)-$3.5(we spent)=$2 0r 57% profit overnight!

Since you bought both a call and a Put you will never lose all the money you put in. If the stock moves just a little, you may lose around $1. Remember, we are hoping for a big movement in the stock in order for this strategy to make us profitable.

If you are right just 50% of the time, what would be your average win ratio?

($2)*(.50)-($1)*(.50)=$1

Remember to always paper trade your strategies first.

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