Purchasing Straddles & Strangles
Strangle A Strangle is very similar to the Straddle except the Call and Put options that you purchase are both ‘out-of-the-money’. The net effect is that the cost of the strategy is lower but, as with anything in investment, the lower the cost, the lower the probability of a return. With a Strangle you are basically paying purely for time value and you require a larger move to occur in order to make a profit. Let’s look at the FTSE example above again, but this time using the 5500 & 5700 Put and Call strikes respectively. The 5500 Puts would trade for say 33 and the Calls for say 29. Net cost of £10 per point = £620 (33 + 29). Your breakeven levels are now 5438 & 5762 (5500 strike - 62 premium & 5700 strike + 62
Tip - when trading Straddles and Strangles from the long side, similar to the suggestion in last month’s piece when you are short this strategy, if you get into a situation where you can take out your initial straddle cost, you should do this and then leave the balance position on - you will greatly extend the life of your option account by following this money management rule. In the Straddle example above you would sell £5 per point if the combined value of the position was 124 (124 x £5 = £620), and so taking your original stake out. You can then carry the position for free. As you will see throughout the entirety of this magazine, there is a common vein of ‘trading psychology’ - essentially putting your mind in a good place through the judicious application of money management parameters and also leverage control - apply these and you will feel exponentially more comfortable with your spreadbetting.
July 2012 | www.financial-spread-betting.com | 55