The long strangle takes advantage of market movement from either direction. The short strangle and long strangle are different in the way they respond to movement in the market. They are both neutral because the trader does not have a preference about the direction of the stocks.
The long strangle is the same with the long straddles in the sense that you can profit from either direction of the market movement. It is however less risky because of the initial cash outlay. And similar with the long straddles, the long strangle has limited profit potential from the direction of the stock in either direction.
For example, if ABC stock is trading at $130 per share her is your long strangle:
Stock @ $65
You can therefore buy the 120 put and the 140 put. If the stock remains anywhere between the two, you can have a loss of 950. If the stock falls below the 110 and 150, you will have a profit.
|Stock Price||Profit (L)|
The above example does not account for the commission, interest and tax. You can create the long strangle with the in-the-money options:
Buy one 120 call @ $14
Buy one 140 put @ $13.50
This is a good position because at least one of the options will still have intrinsic value at expiration. With the stocks between 120 and 140, the option will be $20. The maximum loss will be $7.50. The maximum loss for in-the-money is lower even though the cash outlay is higher. This is because the time premium for this option is lower than the out of the money.
In out-of-the-money, the 120 calls and the 140 calls put had $10 intrinsic value when the stock is at $130. The time premium is lower in in-the-money as you can see when you subtract the intrinsic value from the net cost of the options.
|Option||Price||Intrinsic Value||Time Premium|
|Bullish Strategies||Neutral Strategies||Bearish Strategies|