Long strangles
Long Strangles: A Beginner's Guide
Welcome to the world of cryptocurrency trading! This guide will explain a strategy called a “Long Strangle”. It's a bit more complex than simply buying and holding Bitcoin or Ethereum, but it can be profitable if you understand how it works. This guide is aimed at complete beginners, so we’ll break everything down step-by-step.
What is a Long Strangle?
A Long Strangle is an options trading strategy. Don't worry if "options" sound scary! We’ll simplify it. Imagine you think a cryptocurrency like Litecoin will *move* significantly, but you’re not sure *which direction*. A Long Strangle lets you profit from that big move, regardless of whether the price goes up or down.
Essentially, you’re buying a Call Option *and* a Put Option with the same expiration date, but different strike prices.
- **Call Option:** Gives you the right, but not the obligation, to *buy* the cryptocurrency at a specific price (the strike price) before the expiration date.
- **Put Option:** Gives you the right, but not the obligation, to *sell* the cryptocurrency at a specific price (the strike price) before the expiration date.
In a Long Strangle, the Call Option's strike price is *above* the current price, and the Put Option's strike price is *below* the current price. You're creating a 'strangle' around the current price, hoping the price 'breaks out' of that range.
Why Use a Long Strangle?
- **Profit in either direction:** You profit if the price moves significantly up *or* down.
- **Lower cost than buying the asset:** Options are generally cheaper than buying the underlying cryptocurrency directly.
- **Limited risk:** Your maximum loss is limited to the premiums you paid for the options (the price you pay to enter the trade).
Understanding the Key Terms
Let’s define some important terms:
- **Strike Price:** The price at which you can buy (Call) or sell (Put) the cryptocurrency.
- **Expiration Date:** The date after which the options are no longer valid.
- **Premium:** The price you pay to buy an option. This is your initial cost.
- **In-the-Money (ITM):** An option is ITM if exercising it would result in a profit. For a Call, it means the current price is *above* the strike price. For a Put, it means the current price is *below* the strike price.
- **Out-of-the-Money (OTM):** An option is OTM if exercising it would result in a loss.
- **At-the-Money (ATM):** An option is ATM if the strike price is very close to the current price.
- **Volatility:** How much the price of an asset fluctuates. Long Strangles benefit from increased volatility, see Volatility Analysis.
Example: A Long Strangle in Action
Let’s say Bitcoin is currently trading at $60,000. You believe it will make a large move in the next month, but you’re unsure if it will go up or down.
You decide to implement a Long Strangle:
- **Buy a Call Option:** Strike price $65,000, premium $200.
- **Buy a Put Option:** Strike price $55,000, premium $200.
Your total cost (premium) is $400. This is your maximum loss.
- Scenario 1: Bitcoin Price Rises to $70,000**
- Your Call Option is now *in-the-money*. You can exercise it to buy Bitcoin at $65,000 and immediately sell it in the market for $70,000, making a profit of $5,000 (minus the $200 premium = $4,800 net profit).
- Your Put Option expires worthless.
- Scenario 2: Bitcoin Price Falls to $50,000**
- Your Put Option is now *in-the-money*. You can exercise it to sell Bitcoin at $55,000 (even though it's trading at $50,000), making a profit of $5,000 (minus the $200 premium = $4,800 net profit).
- Your Call Option expires worthless.
- Scenario 3: Bitcoin Price Stays at $60,000**
- Both your Call and Put Options expire worthless. You lose your initial premium of $400.
Comparing Long Strangle to Other Strategies
Here's a quick comparison to help you understand where the Long Strangle fits in:
| Strategy | Risk | Potential Reward | Best Used When... |
|---|---|---|---|
| Long Strangle | Limited (premium paid) | Unlimited (potentially high) | Expecting high volatility and a big price move, but unsure of direction. |
| Buying Bitcoin Directly | Unlimited (can lose everything) | Unlimited | You are confident Bitcoin will increase in price. |
| Covered Call | Limited | Limited | You expect Bitcoin to stay relatively stable or increase slightly. |
Practical Steps to Trade a Long Strangle
1. **Choose a Cryptocurrency Exchange:** I recommend starting with Register now or Start trading. These platforms offer options trading. 2. **Fund Your Account:** Deposit cryptocurrency (usually USDT) into your account. 3. **Navigate to Options Trading:** Find the options trading section on your chosen exchange. 4. **Select the Cryptocurrency:** Choose the cryptocurrency you want to trade (e.g., Bitcoin, Ethereum). 5. **Choose Strike Prices and Expiration Date:** Select a Call Option with a strike price *above* the current price and a Put Option with a strike price *below* the current price. Choose an expiration date that gives the price enough time to move. Consider using Technical Analysis to help determine strike prices. 6. **Place Your Orders:** Buy both the Call and Put Options. 7. **Monitor Your Trade:** Keep an eye on the price of the cryptocurrency and adjust your strategy if needed. See Risk Management for further information.
Important Considerations
- **Time Decay (Theta):** Options lose value as they get closer to their expiration date. This is called time decay, and it works against you in a Long Strangle, see Options Greeks.
- **Implied Volatility (IV):** Changes in implied volatility can significantly affect option prices. Higher IV generally benefits Long Strangles. Monitor Volatility Analysis.
- **Commissions:** Factor in trading commissions when calculating your potential profit and loss.
- **Trading Volume:** Ensure sufficient Trading Volume for the options you select to ensure you can easily enter and exit the trade.
Further Learning
- Options Trading Basics
- Risk Management in Cryptocurrency
- Technical Analysis
- Fundamental Analysis
- Volatility Analysis
- Options Greeks
- Trading Volume Analysis
- Straddle Strategy - A similar strategy to the Long Strangle.
- Butterfly Spread - A more complex options strategy.
- Iron Condor - Another advanced options strategy.
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- Open account
- BitMEX
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