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x-man
x-man
Number of messages : 22
Points : 2119
Date of Entry : 2015-07-30
Year : 55

attention Long Strangle

Thu Jul 30, 2015 10:04 pm
The Long Strangle strategy allows the trader to profit from expectations regarding upcoming high volatility in a currency pair. This strategy requires the purchase of an out-of-the-money (OTM) Call and Put. The Long Strangle differs from the Long Straddle in that the purchase of the options happens at an out-of-the-money (OTM) strike price, and hence premium costs are reduced. However in order for the trader to be able to make a profit, the currency pair must be even more volatile than required by the Straddle.
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When to do it
This strategy works best when the trader thinks that the pair will be extremely volatile in the near future.


The set-up

  • Buy an OTM Call at strike price B (spot + )
  • Buy an OTM Put at strike price A (spot - )
  • At the time of creating this strategy, the pair’s price will be between A and B



Maximum potential profit
The maximum potential profit is unlimited.

Maximum potential loss
The maximum potential loss is limited to the premium paid.

Time impact
In the Long Straddle strategy, time decay works strongly against the trader. As time goes by, the value of both options decreases.

Best/worst case scenario
The best case scenario occurs when the pair’s price increases or decreases by a huge amount.The worst case scenario occurs when the pair’s price does not change by the amount required to start making profit.


Tips
The Long Strangle works well when there are major events that are expected to highly increase volatility. This anticipation enables the trader to create a Long Strangle for a longer duration than a Straddle because of the reduced premium costs. Traders can benefit if they expect the volatility to increase prior to the date of the event and so are able to prolong their options to capture that potential increase in volatility.

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