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 Strangle
Issued on March 06 2011 par Strategies Options
Strangle is a simple variation on Straddle's theme
We saw that strangle was from the same family as straddle.
I - DITM Strangle Variations It's sometimes hard to deal with out the money options, it looks like as if they would invariably epxire worthless. But the spot moves... It has be seen that it might be better to deal with Deep In The Money options, DITM. In case of a strangle, one option at least would expire with some value. Imagine a spot traded at $100, an a strangle 80 call /120 put. That kind of strategy may seem to be good, but it's an illusion ! The call-put parity makes it clear. Interest rate are zero for educational purpose. A long 80 call is a long 80 put plus a long position on the underlying. A long 120 put is a long 120 call plus a short position on the underlying. Thus, A long strangle 80 call/ 120 put is equal to a long 80 put plus a long position on the underlying + a long 120 call plus a short position on the underlying. A long strangle 80 call/ 120 put is equal to along strangle 80 put/120 call. If interest rates aren't zero, one has to take into account the cost of carry of both solution in order to price the difference in prices. If implied volatilities are 30%, rates=5%, for 1 year options it leads to: Call 80 = 26.46 Put 120 = 21.05 Hence, call 80 + put 120 = 47.51 Call 120 = 6.90 Put 80 = 2.56 Hence, call 80 + put 120 = 9.46 The difference 47.51 - 9.46 = 38.05 is just the present value of 40 (120-80), that is 38.05. → 38.05*exp(5%*1year) = 38.05*exp(0.05) = 40 II - Strike Variations The more "out of the money" the option, the less the cost of premium. Here is a long 1 year strangle 90/110 (long 90 put/ long 110 call), implied volatilities set at 30%, interest rates are 5%:  Here is a long 1 year strangle 60/140 (long 60 put/ long 140 call), implied volatilities set at 30%, interest rates are 5%:  III - Maturity Variations Time decay erodes calls and puts. This means that the longer the maturity, the most expensive the strangle. a long 1 year strangle 90/110  a long 6 months strangle 90/110  Next : Risk-Reversal : A First Attempt Previous : Strangle : A First Attempt Download the pricer here BASIC OPTIONS STRATEGIES - INDEX BASIC OPTIONS STRATEGIES - CHAPTER I BASIC OPTIONS STRATEGIES - CHAPTER II BASIC OPTIONS STRATEGIES - CHAPTER III BASIC OPTIONS STRATEGIES - CHAPTER IV Strategies Options |
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