Long Strangle Options Trading: Profit & Loss Calculations: Options, Futures, Derivatives & Commodity Trading

Long Strangle Options Trading: Profit & Loss Calculations

Continuing further from our earlier part on Long Strangle Options Trading Explained: Example & Payoff Charts , here are the details about Profit & Loss Calculations for Long Strangle Options Trading Position
Long Strangle Payoff Function
What are the breakeven points for the Long Strangle Option Trading?
Break even points in a trade are those points (one or multiple) where there is no profit, no loss to the options trader. On either side of break-even points, there is a profit and loss region.
In the payoff function charts, the break even points are indicated as those points where the net payoff function (PINK colored graph) crosses the horizontal (x-axis).
As see in the above payoff function for Long Strangle, the break even points for the examples are $34 and $66.

Upper Breakeven Point of Long Strangle = Strike Price of Long Call Option + Net Total Option Premium Paid
i.e. $60 + $6 = $66
Lower Breakeven Point of Short Straddle Option = Strike Price of Long Put Option + Net Total Option Premium Paid
i.e. $40 - $6 = $34

What is the maximum profit for Long Strangle Option Trading
The MAXIMUM Profit from a Long Strangle Position is said to be UNLIMITED on the upwards side and LIMTIED on the downwards side.
As we can observe from the PINK colored payoff function, if the stock starts an upward move then the return we will receive will be increasing linearly. Say if the underlying price reaches $80, the return will be $14, if it reaches $100, the return will be $34 and so on. That is unlimited on the upwards movement of underlying stock price.
On the downward side, the maximum return is capped or limited to the range of stock price reaching zero i.e. the company going bankrupt. If the stock price drops to $10, the profit is $24, if it reaches $0 then the maximum profit on downside is $34 only.

Maximum Profit of Long Strangle = Unlimited on upside
Profit Achieved When Price of Underlying goes higher than the (Strike Price of Long Call + Net Total Option Premium Paid)
when the Price of Underlying goes lower than the (Strike Price of Long Put - Net Total Option Premium Paid)

Profit calculation of Long Strangle = Price of Underlying - Strike Price of Long Call - Net Premium Paid - for upward movement
Profit calculation of Long Strangle = Strike Price of Long Put - Price of Underlying - Net Premium Paid - for downward movement

What is the maximum loss for Long Strangle Option Trading
The Long Strangle is said to be limited risk unlimited return option position.
Your losses in a long strangle position are limited to a maximum of total amount of option premium you pay for buying the two options (plus any option trading brokerage or commissions you pay for trading options)
Maximum loss of Long Strangle Option = Net Options Premium Paid + Option Trading Brokerage
As seen from the PINK color payoff function, it is $6 (plus any brokerage or commissions paid)

What are the risks in trading Long Strangle Option Trading
Long Strangles are considered to be very safe and limited risk option trading strategy. Since the losses are capped or limited, you know well in advance how much maximum you can loose.
It is considered to be a very safe options strategy. However, there are certain points one should definitely keep in mind while trading Long Strangles.

- Irrespective of the low cost and limited risk, you are still at the risk of loosing your entire option premium paid in case the stock prices dont move much. That will be a 100% loss (plus brokerage)

- Even in case of profit, atleast one of options (call or put) is going to expire worthless.

- Time decay will be bad for this Long Strangle Position from a buyer's perspective. (See Options Time Decay: Explained with Examples).

- Volatility will help keep the option prices high, hence increase in volatility will help Long Strangle Option position.

Let's head on to next part Tips to Enter & Exit Long Strangle Options Trading Position
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