– What about the maid?
– The maid?
– Was he jealous of her, too? He strangled her.
– It’s possible that his intended victim was a man and he made a mistake.
– A mistake? In a nudist camp?
– Nobody’s perfect.
The above quote, while funny, really has nothing to do with this post. But, it does use of the word ‘strangle’, which is a topic of discussion, and contains a valid reason for using it: ‘nobody’s perfect’…so here are a couple strategies that have built-in protection for those not-so-perfect days. So unless you are able to perfectly predict market/stock direction (in which case, why aren’t you on CNBC? /note sarcasm), read on.
I wrote about the short straddle not too long ago…flip that upside down for a long straddle; and the long strangle is very similar to that strategy. Both rely on large price swings and increasing volatility of the underlying stock. Profits are gained from a big move, up or down.
They both consist of buying a call & a put of the same expiration. However, while a straddle also uses the same strike price, a strangle involves a higher strike for the call and a lower one for the put. As a result, a strangle has greater leverage and lower cost, but at the price of increased risk.
While both strategies have a predefined cost (the total of the premiums + fees), a straddle is only worthless when the underlying equals the strike price. The strangle is worthless when the stock’s price is between the call and the put price:
The breakeven points for both include the cost of commisions/fees.
Personally, I prefer long straddles… I like the lower inherent risk and the quicker profits. However, strangles are just as useful, and they come at a lower cost & greater leverage.
I have also found strangles to work better on cheaper stocks, or when the underlying stock’s price is in-between strike prices. This is the reason I went with a strangle on [[CSUN]] ahead of their earnings.
There is of course no reason you can’t buy a straddle on a stock that’s not near a strike price (or vice-a-versa)…but with a strangle, you don’t have to decide whether to buy it above or below the stock’s price. So if the time is right and the stock is not near a strike price, I will generally go with a strangle (yes, I’m simple like that).
The key for either of the two strategies is to pick a stock that will move. Low volatility stocks need not apply. China & the solars generally provide good targets, especially just ahead of earnings.
UPDATE: An excellent straddle opportunity from RC, in [[SEED]] today – earnings after market close. Currently trading right around $5.
UPDATE of the UPDATE: SEED is ripping, up 30%! Will consider selling part of the position at the close to protect profits.
UPDATE II: More from RC. Check out the open interest in [[FINL]] May 2.50 & 5.00 Calls compared to other months! Care to speculate on a buyout?
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Great Post.
Sometimes the simplest reasonings lead to the best profits.
good shit Dpeezy.
And just so all you fuckers know, this information is a gift. I think DPeezy should put up a paypal donation button for this post… Not many sit down and explain how to make some serious cash with a limited downside like you can by using this bread and butter strategy.
Number of things you can use straddles for, strangles should be reserved for the greater anticipation of a move, and more speculation.
Now you can track upcoming earnings announcements through market watch, ibd, msn money, etc… you can anticipate the economic announcements through market/economic calander, or you can find the cramer stocks and bet there’s going to be people fucking around with the stock and doing some strange things to it.
Straddle the entire market or individual sectors with leveraged ETFs etc…
the best strangles are often pre earnings of a high beta stock
http://www.ibankcoin.com/peanut_gallery/index.php/2008/03/25/high-beta-potential-straddles/
there’s a list…
I might even come up with a bigger list, and may even explain options in layman terms…
But then again, you don’t need to know how an engine works to know how to be a good driver.
You’re welcome bitches.
p.s.
I never in my life want to hear any of you complain about a stock market crash and how it wiped you out and how it was someone else’s fault… You should be so lucky to have a crash… With shit like this, you can profit from any direction in the market, so as long as it isn’t sideways, and in the event of an earnings trade, if it is sideways and the earnings meet, simply cashout while you still have most of your timevalue and move on. It’s that simple.