(Long) Strangle Basics

Before most of my posts will make any sense it is important that you understand at least the basics of the strategy I utilize for all my trades. Don't worry if this doesn't make complete sense at first. Take some time, follow my trades, and do some of your own on paper. After a short while you will start to get the hang of it.

I use this one strategy as my primary trading tool for several reasons:
- It is simple. When you are trading the markets while working a day job you don't have time to learn, master and execute a complex trading strategy. You need something that only takes a few minutes each evening. This strategy can be defined by just a few simples rules that can be learned and executed quickly.
- It is direction neutral. Another thing that can be very time-consuming, and often a wild guess at best, is reading the direction a stock will take. Many people complain that trading in the stock market is just a gamble, and it is if you are playing directionally. Each day you have a 50/50 chance of a particular stock going up or down. Sure there are tactics that you can use to put the odds more in your favor, but again these take time to develop. This strategy is direction neutral, meaning that you make money if the stock goes down, and you make money if the stock goes up. The only move the stock can make that doesn't profit is no move at all. So now your odds are 2 out of 3. Not too bad!
- It has unlimited gain and limited risk. A good trait of any strategy for traders who are starting out, or don't have time to babysit trades is limited risk. And this deal is sweetened even more with unlimited profit potential. As mentioned above the only time you will lose money on a strangle is when the stock makes no move at all. Your loss will be limited to the money invested in the strangle, and this can be limited farther using certain techniques. You make money when the stock makes a reasonable move either up or down. A stock move down is limited by the stock price, but there is no limit to how high a stock can go. This gives you unlimited profit potential if the stock rises.

So now are you ready to learn what this strategy looks like? There are dozens of websites that explain the basic layout of a strangle, so I will not take the time to re-explain it here. Take a look at the links below. In a later post I will explain in detail exactly how I utilize this basic long strangle for my trading strategy. Note: I only use the long strangle strategy, so you can ignore any explanation about a short strangle. It defeats many of the advantages we want.

http://www.theoptionsguide.com/long-strangle.aspx
http://www.poweropt.com/longstranglehelp.asp

Again, if those explanations don't make perfect sense don't worry. Just start following my trades and tracking the options on your own. I promise that you will start to catch on. And if you have questions feel free to leave a comment and I will do my best to help explain it better.