Long Strangle Option Screener

Hi, and welcome to the Options Learning Center. I'm going to show you how to buy long strangles and use Barchart to get the most out of the strategy.

What Is A Long Strangle?

A long strangle is a directional options strategy where the trader buys a call and put option on the same underlying asset with the same expiration date, but with different strike prices. The goal of a long strangle is to profit off a significant price movement of the asset, and the profits can be locked in upon exercising or selling the profitable trade before expiration.

• Long strangle: buy a call and a put
• Same asset
• Same expiration
• Different strike prices
• Profit from significant price movement
• Lock profits by selling or exercising

The strategy is often used when traders anticipate a significant price movement in the asset but are unsure of its direction. The trade is profitable when the underlying asset's trading price moves beyond the breakeven points on the downside and upside. The maximum loss condition happens when both the options expire worthless, and is limited to the net premium paid to purchase the long strangle.

Trade Examples

Let's jump on Barchart to look for long strangles.

Screening The Market For Long Strangle Trades

Barchart's Long Strangle Option Screener lets you screen the entire market for underlying assets for specific strategies. To access that feature, head on to the website, click Options at the top, then click Long Strangle.

Once there, you'll be shown a results page based on default filters and criteria. As you can see, the results immediately show you key information you can already use for the trade, like strike prices, breakeven prices, potential maximum losses, delta, and, more importantly, Probability of Profit, which I'll get to in a moment.

You can click on any of the column headers here to change the arrangement of the results. By default, though, they're arranged highest to lowest based on the probability of profit. This is my favorite piece of information when buying a long strangle.

The details here are usually perfect for beginners, but if you want a more fine-tuned screen, Barchart also lets you do that.

Example With Filters/Screening

On the results page, you can see the Set Filters tab. Clicking on that will bring you to a page where you can pick and choose from dozens of option and stock filters so you can customize your trade to your heart's content.

All you need to do is type in the filter you need on the add a filter field, or click the drop-down. The screener combines option and stock filters, giving you a 360-degree view of your screens.

I will focus on the "Probability of Profit" filter at the bottom, and then take it up a notch to 40%. Strangles don't often have high probabilities of profit, so I prefer to have it as high as I can.

Next, I'll click on "See Results", and I have two potential trades, arranged from highest to lowest probabilities of profit.

Usually, I just take the first one, but I'm not sure on Blackberry's stock at the moment, so I'll instead pick PZZA, or Papa John's International.

Now, back to our long strangle since we have our trade details.

For this example, I'll use Papa Johns, which is trading at $46 as of the time of the screen. It suggests buying a long call with a $47.50 strike for 55 cents per share, and a long put with a $45 strike for 60 cents. The total premium for the trade is $1.15, which will also be the maximum loss if things don't work out, and both options expire on August 16, 2024.

Now, let's break down the trade.

Long Strangle Breakeven Prices

For strangles, it's important to know where your breakeven prices lie to the upside and downside.

To get the breakeven to the upside, simply add the total premium to the long call strike. And subtract the total premium from the long put to get the breakeven on the downside. So, that will be $48.65 on the upside, and $43.85 on the downside.

This trade will only see a profit if Papa John's stock price moves beyond any of these points before expiration.

$47.50 + $1.15 = $48.65
$45 - $1.15 = $43.85

Upward Price Movement (Profit from Long Call)

Now, let's assume that Papa John's price increases to $52 before expiration. That means your long call trade leg is in the money.

You can now exercise the long call and buy $100 Papa John's shares for $47.50, then sell it for $52 on the market. For that trade, you'll receive $335, less trade fees.

• PZZA stock price is $52
• Long call is in money
• Exercise call, buy at $47.50
• Sell at $52 on market
• Net $335 minus fees

That's the long way to profit from options. However, if your option still has a few days before expiration, you can sell it instead of exercising it and earn more.

Option premium prices are made of intrinsic and extrinsic value. The intrinsic value is how much the option is in the money, and the extrinsic value is the time value that remains. So, if Papa Johns is now trading at $52, your $47.50-strike call has $4.50 of intrinsic value, but the premium might be higher if there is time remaining on the option contract.

• Sell option for higher profit
• Option premiums: Intrinsic & extrinsic value
• Intrinsic: In-the-money value
• Extrinsic: remaining time value
• PZZA $47.50 call has $4.50 intrinsic value

$52.00 - $47.50 = $4.50

Downward Price Movement (Profit from Long Put)

If the price of Papa John's goes down to, let's say, $40 instead, you have two options.

You can exercise the long put, and you'll sell 100 shares of Papa Johns, and collect $45 a share. That means your net profit for the trade will be $3.85 after the initial premium.

• PZZA Stock Trading Price: $40.00
• Exercise price: $45.00
• Premium paid: $1.85
• Net profit: $3.85

$45.00 - $40.00 - $1.15 = $3.85

If you don't own the shares, you can sell the long put as long as it hasn't expired yet. Like the call option, it might have some time value left, making it worth more to you than exercising it.

Selling the Put May Result in A Higher Profit.

Maximum Loss Condition

However, if the price of PZZA is $46 at expiration, then both your call and put options are out of the money, and expire worthless.

Your loss is limited to the premium you paid upfront, which in this case is $1.15. As long as the underlying price stays between the strike prices, you will get maximum losses.

$0.55 + $0.60 = $1.15

Profit/Loss Across Different Price Points

For a better look at how this particular long strangle trade might look, here's a table detailing the profit/loss scenarios across different price points.

As you can see, the maximum loss conditions occur between the $47.50 and $45 strike prices. Profits begin when the stock trades above the upper breakeven price or below the lower breakeven price. And the further the underlying price moves away from the breakeven price, the more profit you'll get.

Screening For Long Strangles On Specific Assets

Now, I showed you how Barchart's Options Screener searches for potential trades in the entire stock market. You can also look for long strangles using a specific asset.

To do that, visit Barchart.com, search for the asset, which takes you to the Quote Overview page for the asset, and then go to the left-hand panel and look for Straddles and Strangles. Click on that, and you'll be brought to the results page for long straddles. From there, click on the long strangle tab where you can sort using the column headers, change the expiration dates, or enter a specific strike price.

To further refine your selection, you can also click "screen" and then "Set Filters", and then add or change the filters as you like. It's that simple.

Pros and Cons

The long strangle has unlimited profit potential to upside, and significant profit potential to the downside. This is perhaps its biggest selling point. It also can be a lot less cheaper than long straddles, a similar strategy, and also enjoys the bi-directional price bias—that's to say, up or down, you have a chance of profit. Lastly, strangles have defined risks at the onset of the trade.

• Unlimited Profit Potential
• Lower Cost Compared to a Straddle
• Flexible Directional Bias
• Limited Risk

However, long strangles need significant price movement to profit. Long strangles will profit most from high volatility, but you have to be careful on your entry point. Ideally, you want to enter the trade when volatility is low and you expect it to increase- perhaps during earning season. If you enter when volatility is already high, you might pay a higher premium, reducing potential profit unless volatility continues to rise.

The trade is also, like all options, sensitive to time decay. The closer it is to expiration, the less the option is worth. Lastly, a wider spread between the strike prices may mean you're paying less premium, but it also means that the underlying asset needs to move a lot more for you to profit.

• Requires Significant Price Movement
• Time Decay (Theta)
• Volatility Risk
• Spread Between Strike Prices Indicate Maximum Loss Range

Conclusion

Long strangles are cheaper and a good alternative to the more expensive straddles, but they require a more significant price movement to profit. That's why its important to leverage all the tools you can get your hands on, including Barchart's Long Strangle Option Screener, to make sure you maximize your profit potential.

For more information about long strangles and other option trading strategies, visit the Barchart Options Learning Center.