The exact opposite of buying strangles! In this case, the investor sells an OTM call and OTM put. Let's take a look at the graph: As mentioned earlier, in the selling straddle post, when we sell a put we profit when the price is above the break even price (strike-premium sold) and when we sell a call we profit when the price is below the break even price (strike-premium sold). The profits and losses for selling a strangle are as follows:
Price is above the put break even price and below the call break price: Profit! Maximized at premium collected from both sales When the price is not in the aforementioned range: Loss is unlimited Advanced Tips:
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Strangles are similar in essence to straddles--the thing that changes is the type of strike we purchase or sell them at. When buying a strangle, the investor buys a call at an OTM strike price (above the current price) and buys a put at an OTM strike price (below the current price). Here is the graph: When price is above the call break even price or below the put break even price: Unlimited profit!
When price is not in the aforementioned range: Loss! The maximum loss is constant at all prices in this range and is equivalent to the total premium paid for both options. Advanced tips:
Selling straddle is the exact opposite of buying a straddle. Instead of buying a call and put option at the same strike price, the investor instead sells a call and put option the same strike price. When selling a put, you profit when the price is above the break even price (strike-premium collected). When selling a call, you profit when the price is below the break even price (strike-premium collected). When selling a straddle therefore, you profit when the price is above the call break even price and below the put break even price.
Price is above the put break even price and below the call break even price: Profit! Maximum profit is at the strike price. Therefore, when selling a straddle you are under the impression that the price will be at the strike price by expiration. Price is not within the aforementioned range: Loss. Unlike buying a straddle, when selling a straddle there is an unlimited amount of loss. Advanced Tips:
Naked options? For novices. Now that we've discussed the theory behind vertical spreads, we are ready to move to straddles! What is a straddle? When buying a straddle, the trader buys both a call and put at the same option price. The investor makes money regardless of the direction of the stock. However, it depends on how much a stock increases or decreases. Let's analyze when we profit or lose when buying straddles! But first we need to recall when we profit when buying naked calls or options. When the price is above the break even price (strike + premium paid) for a call, we profit. When the price is below the break even price (strike- premium paid) for a put, we profit. SImilarly: Price is greater than call break even price or less than the put break even price: Profit! Price is not within the aforementioned range: Loss. Your maximum loss is capped at the premiums paid for both options.
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NishaNinteen year-old trader, future connoisseur of options. Follow me on Twitter!
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