Definition of 'Strangle'
The strangle is a neutral strategy, meaning that it does not have a directional bias. The goal of the strangle is to profit from a large move in the underlying asset, regardless of the direction of the move.
The strangle is a relatively low-risk strategy, as the maximum loss is limited to the premium paid for the options. However, the strangle also has a limited profit potential, as the maximum profit is equal to the difference between the strike prices minus the premium paid.
The strangle is often used by traders who are looking to hedge their positions or to generate income. The strangle can also be used as a volatility play, as it profits from increased volatility in the underlying asset.
To calculate the profit or loss of a strangle, you must first determine the difference between the strike prices. This is the strangle's theoretical profit or loss. Then, you must subtract the premium paid for the options from the theoretical profit or loss. This is the strangle's actual profit or loss.
The strangle is a versatile options strategy that can be used in a variety of market conditions. However, it is important to understand the risks and rewards of the strangle before using it.
Here are some additional considerations for using the strangle:
* The strangle is most effective when the underlying asset is expected to experience a large move in a short period of time.
* The strangle is less effective when the underlying asset is expected to trade sideways or in a narrow range.
* The strangle is a relatively low-risk strategy, but it also has a limited profit potential.
* The strangle can be used as a hedge or to generate income.
* The strangle can also be used as a volatility play.
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