Stocks & Commodities V. 32:1 (15): Futures For You by Carley Garner

Stocks & Commodities V. 32:1 (15): Futures For You by Carley Garner
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Futures For You by Carley Garner


If strangle traders can make money regardless of market direction, doesn’t it provide the best odds of success?

The term strangle is somewhat ambiguous in that it can be applied to long options, short options, and even futures strategies. Accordingly, I feel like this question is best answered by addressing all three approaches. In order to do the topic justice, we’ll need to extend this discussion to my next two columns in the February and March 2014 issues.

We’ll begin with the strategy of buying option strangles. This includes the simultaneous purchase of a call and a put option with out-of-the-money strike prices. If you’re not familiar with options, a call option is the right to buy the underlying futures contract at a specific date and time in the future at a specific price (referred to as the strike price). A put option is simply the right to sell a futures contract at the strike price of the option at a specified point in the future. Buying a call is a bullish proposition, while buying a put is bearish. Thus, the purchase of both creates a neutral strategy that anticipates a large move in one direction or the other.

Naturally, owning the right to buy or sell the underlying futures contract at a specified price in the future comes at a cost. Buyers of these options must pay a premium to the sellers to acquire the right. This is the same concept the insurance industry operates on; the insured pay a premium to the insurer for the right to benefits should a certain event occur in the future. Most of the time, an event that triggers a claim does not occur and the policy seller (the insurance company) keeps the premium.

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