Strangle the Market

Yesterday I discussed the straddle. The simultaneous buying or selling of the same at the money (ATM) call and put strikes. That can be quite expensive for the buyer but still dangerous for the seller. A more affordable way to bet on volatility is to trade the strangle. A strangle is buying or selling out of the money (OTM) options. For instance, with Apple (AAPL) trading at 554 the March 500 Put, 600 Call strangle is trading at 15 (8 in the call and 7 in the put).

That seems like a lot of money but it's really not  and I'll tell you why. AAPL has a 52 week range of  385.10 to 575.14, nearly 200 points. Who's to say that AAPL can't move 50 points either way by March? A long strangle is a great way to trade movement. For instance, if I buy the above strangle for 15  and either the call or put hits 15 I sell it and the other option is free. Or, if the strangle goes to 30 I can sell half and let the other half run at no cost.

Of course, if AAPL stays between 500 and 600 between now and March 22 (monthly options expire on the third Friday of the month) I lose the entire $15. That is why some people believe in selling a strangle and let time decay do its job. I'm not a big fan of that strategy simply because the risk reward ratio doesn't work for me. A short strangle can expire worthless for 9 straight expirations and then make a blow out your portfolio move on the tenth expiration.

What it comes down to is a strangle is a hands on and active trading strategy and not something you put on and don't look at for a week. And, for me? I'd rather do the strangling than get strangled. So, if you foresee big moves and high volatility, go ahead and be an Strangle the Market!



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