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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.
- 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.
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.
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.