Long Strangle

Strangles need LARGE moves to profit. If your breakevens are 15% away and the stock only moved 8%, you're still in the dead zone between strikes. Both options can be losing value. This is why strangles require bigger moves than straddles.

Select strikes based on expected move. If you expect 10% move, choose strikes that create breakevens around 8-10% (giving some cushion). Use delta as guide: 0.30 delta options are ~30% probability of being ITM. Match strike width to conviction about move size.

This is actually the goal! If the stock moves significantly in one direction, one option becomes valuable while the other becomes worthless. Your profit is the winning side's value minus the total cost. You don't need both sides to win.

It depends on the stock's historical move. If it typically moves 5-7%, a straddle is better (narrower breakevens). If it typically moves 10%+, a strangle can be better (lower cost, more contracts). Calculate breakevens for both and compare to historical moves.

Both options expire worthless, and you lose the entire premium paid. This is the worst-case scenario for a strangle. That's why it's crucial to have catalysts that historically cause moves larger than your breakeven distances.

Calculate the 'move ratio': Historical avg move % ÷ Strangle cost %. If the ratio is above 1.3, the strangle offers good value. Example: Historical moves avg 12%, strangle costs 8% of stock price. Move ratio = 12/8 = 1.5 - good value.

Yes, especially in Australian markets where put skew can be steep. If OTM puts are expensive, consider using lower delta put (0.20) and higher delta call (0.30) to balance costs. This gives you similar overall cost with adjusted risk profile.

Leg out when: 1) One side is very profitable (80%+ of value) and the other is nearly worthless (<10% of original cost), 2) You want to lock in gains but keep lottery ticket exposure, 3) You have a view on potential reversal. Close entirely when: Profit target reached or you want clean exit.

IV crush affects strangles less than straddles because OTM options have lower vega. However, it still hurts if the move was insufficient. Close quickly after earnings (within 1-2 days) to capture directional gains before IV crush fully materializes.

Strangles allow more leverage on large moves. If you have A$3,000 and expect 15% move: 2 straddles at A$1,500 each might profit A$800 each (A$1,600 total). 6 strangles at A$500 each might profit A$500 each (A$3,000 total). Strangles outperform on big moves.

Diversify across 3-5 uncorrelated catalysts, target 10-15% total portfolio at risk, stagger expiries to smooth theta, track aggregate vega and theta daily. Allocate more vega to highest-conviction setups. Maintain dry powder for unexpected opportunities.

Key filters: 1) IV Rank < 35%, 2) A-VIX below 20-day average, 3) Move ratio > 1.3, 4) RSI between 30-70 (not extreme), 5) No trend (ADX < 25). Combining multiple filters can improve EV by 8-12% vs unfiltered entries.

If catalyst is delayed beyond expiry: Close immediately and roll to next appropriate expiry if thesis is intact. Don't hold a strangle without its catalyst - theta will destroy it. Assess if delay changes the expected move magnitude or probability.

Delta hedge when stock approaches one strike and you want to isolate vega exposure. Strangle gamma is lower than straddle, making hedging less effective for capturing small oscillations. Best use: When delta exceeds ±0.40 and you don't have directional view.

Separate backtest results by: 1) Bull vs bear market (ASX 200 above/below 200 SMA), 2) High vs low volatility (A-VIX above/below 16), 3) Pre vs post COVID (structural change). Strangles typically work better in low-vol regimes. Adjust strategy or sizing based on current regime.