Strangles Generating More Interest

Posted by Bull Bear Trader | 10/23/2008 11:20:00 AM | , , , , | 0 comments »

Recently, high volatility is causing some option strategies, such as selling strangles, to look appealing again (see WSJ article). A strangle is an option strategy where you buy out-of-the-money puts and calls, as opposed to a straddle where both options are at-the-money. For those buying the position, you are hoping for volatility - with movement in either direction. Right now, as a result of higher volatility, the strategy is more expensive than it has been in the past, offering opportunity for those who sell the position. Typically, selling the strategy is safer when the straddle options are deeper out-of-the-money, but of course, deep out-of-the-money options do not usually generate as much premium - until now. The higher volatility has increased premiums to the point that deep out-of-the-money options, even for those tied to historically lower volatility stocks, are looking attractive. Each position needs to be considered carefully for risk and reward, but those with the stomach to sell option are seeing new opportunities and possibilities.