A Strangle is created, either by buying or selling a call option and a put option. While buying the options, we create a Long Strangle and by selling them, a Short Strangle. The important thing to note here is that, the put option has a lower strike price than that of a call option. The biggest difference between the two strategies is that in a Strangle, the premium outlay is lesser than that in a Gut. In a Long Strangle, a person buys two Out of Money options whereas in a Gut both the options are in the Money.
Secondly, the maximum loss in case of a Long Strangle is limited to the sum of the premium paid, Rs. 77.95 in our example, but for a Long Gut the maximum loss is the sum of the premium paid less than the difference between the two strike prices. In our example, the premium paid is Rs. 220.05 and the difference between the strike prices is 120 ensuring that the maximum loss cannot exceed Rs. 100.05. On doing a comparative analysis of the examples above, we see that the Strangle can be created on a outlay of Rs. 77.95 with a no profit range of 4,022-4,298 and the Gut on an outlay of Rs. 220.05 with a no profit range of 4,000-4,320.
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