A strangle strategy is an options trading strategy that involves simultaneously buying a call option and a put option on the same underlying asset, with the same expiration date but different strike prices, typically both out-of-the-money. This strategy profits from significant price movements in either direction.
Mechanism
The operational mechanism involves purchasing an out-of-the-money call option with a strike price above the current market price and an out-of-the-money put option with a strike price below the current market price. Both options share the same expiration. The cost of implementing the strategy is the sum of the premiums paid for both options. Profit occurs if the underlying crypto asset’s price moves beyond either strike price by more than the total premium paid.
Methodology
This strategy is employed when a trader anticipates a large price swing in the underlying crypto asset, such as Bitcoin, but is uncertain about the direction. The methodology involves selecting strike prices and expiration dates that reflect the expected magnitude and timing of volatility. Risk management includes monitoring the total premium paid, which represents the maximum potential loss, and adjusting positions as market volatility changes. This is a common approach in institutional crypto options trading.
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