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A strange rat’s nest of options: Constructing a trading strategy for volatile market conditions (1) Straightforward strategy
1. Principle of strategy
A strangle strategy involves the simultaneous purchase or sale of call and put options with different strike prices. Unlike the straddle strategy, the call and put options of the straddle strategy usually have different strike prices, where the strike price of the put option is lower than the current market price and the strike price of the call option is higher than the current market price.
2. Construction method:
Long Strangle: Buying a put option with a lower strike price and a call option with a higher strike price simultaneously. Short Strangle: Selling a put option with a lower strike price and a call option with a higher strike price simultaneously.
Risks and benefits
Buy Le style:
Return: Theoretically unlimited, when the price of the underlying asset rises or falls significantly, the return increases.
Risk: Limited and fixed, maximum loss is the total option premium paid.
Advantages: Compared with the straddle strategy, the initial cost is lower because the execution price is further away from the current market price.
Disadvantages: Requires larger price movements to achieve profitability
Selling style:
Benefit: Limited and fixed, the maximum profit is the total option premium received.
Risk: Theoretically unlimited. Losses increase when the price of the underlying asset fluctuates significantly.
Advantages: Stable income, suitable for less volatile market environments.
Disadvantages: Exposed to greater risks, especially when the market fluctuates significantly.
3. Select an option contract
Execution price:
For a buy strangle, when choosing a strike price you will usually choose an option that is far away from the current market price. For selling strangles, choose options that are relatively close to the market price but still some distance away.
4. Greek letter risk management Delta (Δ):
Since the execution prices are different, the delta values will not be completely offset, so attention should be paid to the direction risk. Gamma (Γ): Gamma is lower because the option strike price is further away from the current market price. Theta (Θ): Theta has a greater negative impact when buying a strangle, and the opposite is true when selling a strangle. Vega (ν): A buying strangle is sensitive to rising volatility, while a selling strangle is sensitive to a falling volatility.
5. Actual operation process
