Option Strangle

I want to talk today about a fairly risk free option strategy known as a strangle.

A strangle strategy involves buying both a Call and a Put option, on a single security, in anticipation of an increase in volatility. The maximum loss on this trade is the price of the Call and the Put, while the upside is unlimited. The beauty of this strategy is that the direction of the move in price is not important, only the magnitude of the move.

This strategy is ideal when dealing with small companies, with publicly scheduled announcements whose results may have a dramatic impact on the share price. One type of company, that fits the above criteria, are small pharmaceutical companies, with FDA announcements approaching (The FDA schedule can be found HERE). Before the announcement, an out of the money Call and Put option should be bought, as the results of the test could very well make or break a company, leading the share price to soar or crash.

I will be using this strategy more and more throughout the following year, and will update the blog with any and all moves I make.