Option Trading Case Study: Finding The Ultimate Strangle Trade?

short strangle

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I'm trying something new here with these option case studies. Let me know what you think via the comments section after watching the videos because I'd be more than happy to make more.

Adding a suggestion of what you'd like to see would be helpful too. . .

Strangles = A Pure Volatility Play

Strangles are simply two naked options, both call and put, surrounding a stock with extremely high volatility. The absolute key here is: extremely high volatility.

Without this element, there is not strange play - period, end of story! Don't try to "fit" the stock into the strategy because it won't work out over time.

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In this case study video, I'll show you exactly how to find out if the volatility is high enough for this strategy. Plus, I'll cover one stock that is possibly one of the best candidates I've seen in months for a strangle trade.

[youtuber youtube='http://www.youtube.com/watch?v=oUO5FyXXguw']

 

Here are some key points to remember from the case study:

1) Only trade on Stocks with implied volatility higher than its 70th percentile.

2) The higher returns mean allocating more money towards the trade. But limit your positions to 2-3 strangles at a time so you can properly manage the risk.

3) Adjustments will be needed and are best when you roll down/up the untested side to "re-center" the strategy.

4) Close the strangle once volatility collapses, don't hold until expiration if you don't have to.

What Did You Think?

First case study down.

I know there is a lot more to come but what did you think? Was it helpful or not? What was missing or what did you like best?

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.