No. of Recommendations: 2
Investopedia: Option Strangle - An options strategy where the 
investor holds a position in both a call and put with different strike 
prices but with the same maturity and underlying asset. This 
option strategy is profitable only if there are large movements in the 
price of the underlying asset. 

This is a good strategy if you think there will be a large price 
movement in the near future but are unsure of which way that price 
movement will be.

Read more: 
http://www.investopedia.com/terms/s/strangle.asp#ixzz2FekSVz... 


Current SPY price: 145.20

Options:                                           Jan                               Feb
Price of a Call 10%  higher(160):                 .01                               .07
Price of a Put 10% lower (130):                   .17                              .70

Combined cost for strangle:                       .18                              .77

Current Prices for “at the money”  Dec. Exp. Options (to approximate 
values of above options very close  to exp. Of course, “in the money” 
options are worth about how much they are “in the money” as a minimum)

 put:                1.80   profit at this price: $1.62, or 900%               $1.03, or 134%
call:                 1.09                      $ .73, or 400%                $.32, or    41%

Current Prices for “at the money” Jan. exp. Options (to approximate
values of the Feb. options should the underlying stock move 10% in the 
next month.

Put:                  2.07                                                                               $1.30, or 169%
call:                  2.98                                                                                $2.26, or 294%



As the definition says, a strangle is a bet that a stock (or in this 
case, an ETF) will move significantly in a short period of time, but you 
are not sure which direction it will move, so you cover both sides. If 
the stock does not move substantially early enough, or fast enough, you 
lose money, up to all you have invested. The sooner the underlying (I.E, 
the stock/ETF) moves, and the further it moves, the more you make. The 
returns listed are if SPY moves the full 10% in the given time frames. 
The stock does not have to move to the full 10% for the trade to make 
money, and it could also move further than the strike prices, at which 
point the value of the option increase approx. 1 dollar for every dollar 
SPY moves further in the money.

I have not followed the process for the spending. I believe the “fiscal 
cliff” kicks in Jan. 1, although it can always be retro-actively 
reversed. However, it seems to me the potential to affect markets are in 
the next months, so these two options cover that time frame. 

I am not recommending this strategy.... more just an exercise for 
thought. My success rate with buying options is not very good 
(fortunately, my success rate with selling them is great). I put this up 
partly for fun, partly to make my brain work through the process (I have 
not done any options lately because the very thing this strangle is 
designed to capitalize on: political interference in the market system: 
with politics and central bank policy being the primary market movers, 
I've chosen to sit it out for a while. However, perhaps this might be 
worth considering.... Please feel free to put your 2 cents in; however, 
if all you can contribute is that all options are evil and anyone who 
trades them is the devil's spawn, please spare us.

And, of course, be aware that everything re-sets with the open today, so 
the particular options I quote will not be the correct ones. Adjust 
accordingly to the situation when you decide to put the trade in.

Cheers,

Doug
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