When it comes to options trading, you’ll often hear about different strategies you can use to make money. One such strategy is strangle trading, which can be used in several ways to capitalise on price movements. In this article, we’ll look at how the strangle trade works and some of its benefits in Australia. If you want to learn more about options trading, you can visit Saxo Bank.
What is a strangle, and how does it work?
A strangle is an options strategy that involves simultaneously buying both a call and put option with the same expiration date but different strike prices. The investor will purchase the call option at a higher strike price and the put option at a lower strike price. If done correctly, this allows them to benefit from movements in either direction – up or down – without speculating which direction the stock might go.
The goal of a strangle is to take advantage of big swings in the underlying asset’s price while limiting your risk by capping how much you can lose should things not move as expected. If prices do move significantly enough, identifying opportunities is possible even if the underlying instrument never reaches one of the two strike prices.
The benefits of using a strangle in Australia
Strangle trading can be beneficial for Australian investors in several ways. Firstly, it allows them to take an aggressive stance on a stock without guessing how the price will move. It means they can benefit from a big swing in either direction and they don’t have to worry about whether their prediction was correct.
Furthermore, strangles provide more flexibility than other strategies since you can adjust your strike prices if you think the underlying asset will move differently than expected. It enables traders to manage their risk better and increase their chances of doing well should things go as planned.
Finally, strangles also allow traders to gain exposure to stocks that may be too expensive. For instance, if purchasing shares of a specific stock would be too expensive, they can buy a strangle and benefit from smaller movements in either direction with the same strike prices.
How to use a strangle in Australia
When using this strategy in Australia, it is vital to understand the risks and rewards associated with strangle trades. There are two main types of strangle strategies: bullish and bearish.
The bullish strangle involves buying both a call option and a put option at different strike prices above the current stock price. The goal here is to benefit from an increase in the underlying asset’s price, but with limited risk, if things go differently than expected.
On the other hand, the bearish strangle involves buying both a call and put option at different strike prices below the current stock price. It allows traders to take advantage of a decrease in the underlying asset’s price with limited risk should things not move as expected.
When using either of these strategies, you must ensure that you have adequate funds in your account. It is because options trades involve a margin requirement and can lead to significant losses if the stock moves against your position. That said, strangles can be an effective way for Australian investors to take advantage of price movements without guessing which direction the stock will go.
The risks associated with using a strangle
Strangle trading carries certain risks that should be considered before entering a position. Firstly, there is the risk of the stock not moving significantly enough to take advantage of it, meaning that you’ll have to close out your position at a loss.
Secondly, strangles may be subject to time decay if held for too long. It occurs when the option’s value decreases over time and can lead to losses if the underlying asset doesn’t move as expected.
Finally, unlimited losses are always possible if the market moves against your position. Therefore, it is vital to be aware of all these risks before entering any strangled trade in Australia.
Conclusion
Strangle trading can be an effective way for Australian traders to take advantage of price movements without guessing which direction a stock will go. However, it is vital to understand the risks associated with this strategy and ensure that you have adequate funds available in your account before entering any positions. By carefully managing your risk and choosing the correct strike prices, strangles can give investors a great way to gain exposure to volatile markets without limiting their upside potential. With that said, it is always essential to do thorough research before entering any options trade, as losses are possible if things don’t move as expected.