In the money Strangle

Has anyone ever traded an in the money strangle?

Risk vs reward is huge.

For example, last week I bought a BHP MAY $27 Call / $37 Put for $10.39
(BHP was at $32)

The Intrinsic value of the spread will always be $10 so my risk is only 39c, with an uncapped profit.

The best part is your losing leg (i.e the put if market goes up, or call if it goes down) actually gains time value as it moves against you. So If BHP runs to $37 this week I have a call worth $10, and an ATM put with 3 weeks to go worth approximatley $2. The spread is now worth $12.

ROI is 15% (1.61/10.39)
Return on Risk is 412% (1.61/.39)

If BHP runs higher, even better as at that stage your deltas are 1 on the call, around -.5 on the put, and that difference will increase as the market continues to rise. Need to be careful though time will start eating away at the put

Best part is non-directional strategy, just a volatility play. Not caring if the market goes up, or down, just so long as it moves

what if bhp doesnt move high enough as what you anticipated here ? strange/straddle is good, but stock need to move a lot.

cooper1308 said:

Has anyone ever traded an in the money strangle?

Risk vs reward is huge.

For example, last week I bought a MAY $27 Call / $37 Put for $10.39
(BHP was at $32)

The Intrinsic value of the spread will always be $10 so my risk is only 39c, with an uncapped profit.

The best part is your losing leg (i.e the put if market goes up, or call if it goes down) actually gains time value as it moves against you. So If BHP runs to $37 this week I have a call worth $10, and an ATM put with 3 weeks to go worth approximatley $2. The spread is now worth $12.

ROI is 15% (1.61/10.39)
Return on Risk is 412% (1.61/.39)

If BHP runs higher then even better as at that stage your deltas are 1 on the call, around -.5 on the put, and that gap will increase as the market continues to rise. Need to be careful though time will start eating away at the put

Best part is non-directional strategy, just a volatility play. Not caring if the market goes up, or down, just so long as it moves

Click to expand...

I shouldve clarified, in the money strangle vs the traditional out of the money strangle.

For me to be profitable I only need the BHP to really move down to $29 or up to $35 as the time vlaue component will increase enough in the losing leg.

So I need BHP to be move 10% either on the up or downside, and i've got 4 weeks for it to happen. In this market i'm quietly confident that can be acheived. And I should net 100% ROR as a minmum for my efforts

I am not a fan of out of the money strangles unless implied vols are way out of whack

Cooper, not sure what you mean by ITM being better than OTM strangles?

In your example, you have paid $10.39. I keep a record of some opton settlement prices and BHP is one of them. On Tuesday last week, BHP closed at $32. On those historic, settlement prices, the ITM strangle in your example was priced at $10.35. The OTM strangle was priced at 32c.

Now, you have a $10 strike difference which means you have 35c extrinsic value (or 39c in your trade) - or sometimes better known as time value.

The OTM strangle has 32c extrinsic value. This means they are practically identical and would be affected by volatility, movement, etc, etc in the same way.

Disadvantages of the ITM strangle vs. OTM strangle:
- it costs considerably more to put on than the OTM.
- there is generally much more slippage when trading ITMs.
- the losing OTM/s can be left to expire worthless meaning there are no further fees to exit the trade where the ITM has to be closed or exercised.

Your right.. There are a few little advantages though that I can see. correct me if i'm wrong.


If you were in the ITM strangle, today you could sell $37 calls against your bought $27 calls.....This will cap your profit on the upside to $10 but you will pick up 32c. This essentially means we have paid $10.07 for a $10 spread, and still retain complete exposure on the downside.

Lets now assume BHP gives up 10-12% and is trading back at $31 then you should be able to sell $27 puts against your $37 puts for lets say 25c (roughly what a put $4 OTM is worth today) for 27c

Before commissions, we have now paid $9.80 for a spread with intrinsic value of $10, and an OTM strangle would almost never have been in profit.

Sails is there a better way to construct the above scenario? Im probably over complicating something that can be constructed easier

I guess one advantage using the ITM vs OTM is it provides great money management as a default. You can't blow yourself up if you try

cooper1308 said:

...If you were in the ITM strangle, today you could sell $37 calls against your bought $27 calls.....This will cap your profit on the upside to $10 but you will pick up 32c. This essentially means we have paid $10.07 for a $10 spread, and still retain complete exposure on the downside.

Click to expand...

OK - were are talking synthetics here - meaning almost identical strategies. In order to compare apples with apples, we need to perform the same tasks on both.

Above you have stated the adjustment you would like to do - that is selling the $37 calls against the $27 calls you own. In the OTM, you can perform exactly the same thing and simply sell the $37 OTM call you already own. You pocket the identical profit. Believe me, it will leave exactly the same risk / reward as the ITM and the benefit of not having to pay to exit the ITMs.

Lets now assume BHP gives up 10-12% and is trading back at $31 then you should be able to sell $27 puts against your $37 puts for lets say 25c (roughly what a put $4 OTM is worth today) for 27c

Click to expand...

Same as for the calls, you simply sell your OTM puts for the same amount.

Before commissions, we have now paid $9.80 for a spread with intrinsic value of $10, and an OTM strangle would almost never have been in profit.

Click to expand...

OK- let's assume we paid the same extrinsic value for the OTMs as we did for the ITM which was 39c on your trade. Then we sold the call for 32c, then sold the put for 25c. We have made a total of 18c (57c-39c) on the OTM strangle. Pretty close to your locked in profit of 20c - except that the ITM still has to be exited with fees and slippage expense in addition to the fees paid - meaning it is going to cost more over the course of the trade.

Sails is there a better way to construct the above scenario? Im probably over complicating something that can be constructed easier

Click to expand...

Normally, just use the OTMs. Much less fees and not so complicated. However, as always, just take care before a stock goes x-dividend as it does affect option pricing (eg calls are cheaper, puts are more expensive) and can create some false illusions.

I guess one advantage using the ITM vs OTM is it provides great money management as a default. You can't blow yourself up if you try

Click to expand...

LOL - the same amount of extrinsic is being risked - so the end result will be the same if we ignore exit fees/slippage on the ITM legs...

Do you have the Hoadley software? The free version of OSET gives the ability to compare two strategies with up to about four legs in a strategy. Check it out and overlay the ITM vs. the OTM. When I first started trading options, I also thought I had found a great strategy in these ITM strangles as there is something satisfying watching one of the legs gaining in price even though the other is losing. However, I did many of these overlays and realised the Hoadley software didn't lie. In fact, the ITM strangle creates an illusion of safety. The OTM keeps it properly in perspective - at least that how I found it.

BTW, if this a live trade, don't do anything impulsive! If it's already there, best to continue to manage it as you had planned, but be aware that any adjustments you make will be the same as if it were an OTM except for the added cost of exiting the ITM legs sometime before expiry.

Hope this helps

sails said:

LOL - the same amount of extrinsic is being risked - so the end result will be the same if we ignore exit fees/slippage on the ITM legs...

Click to expand...

yeah I realise the risk is the same, but using the ITM it is impossible to blow yourself up, eg:

If I've got 55k to invest, then theoretically I can spend that whole 50k on an OTM strange by buying 180 OTM strangles @ 30c - risk = $55k

If I want to use the ITM then the most I can possibly purchase is 5 contracts @ $10.30.....risking $1500

Risk is the same but ITM will simply not let you blowup even if you try. Good for those who are tempted by leverage and over-expose their accounts

sails said:

Do you have the Hoadley software? The free version of OSET gives the ability to compare two strategies with up to about four legs in a strategy. Check it out and overlay the ITM vs. the OTM. When I first started trading options, I also thought I had found a great strategy in these ITM strangles as there is something satisfying watching one of the legs gaining in price even though the other is losing. However, I did many of these overlays and realised the Hoadley software didn't lie. In fact, the ITM strangle creates an illusion of safety. The OTM keeps it properly in perspective - at least that how I found it.

BTW, if this a live trade, don't do anything impulsive! If it's already there, best to continue to manage it as you had planned, but be aware that any adjustments you make will be the same as if it were an OTM except for the added cost of exiting the ITM legs sometime before expiry.

Hope this helps

Click to expand...

Good stuff, will download it right away. Anything else you can recommend please forward. What are your thoughts OptionVue?

cooper1308 said:

yeah I realise the risk is the same, but using the ITM it is impossible to blow yourself up, eg:

If I've got 55k to invest, then theoretically I can spend that whole 50k on an OTM strange by buying 180 OTM strangles @ 30c - risk = $55k

If I want to use the ITM then the most I can possibly purchase is 5 contracts @ $10.30.....risking $1500

Risk is the same but ITM will simply not let you blowup even if you try. Good for those who are tempted by leverage and over-expose their accounts.

Click to expand...

Now I see where you are coming from about not blowing yourself up - like a forced means of money management with the ITMs...

But if we are comparing apples with apples, they must be the same quantity! So, you would still only buy 5 OTM contracts and leave the remainder of funds in the bank earning interest or some other strategy or investment. Better than leaving it blobbing around inside an ITM strangle not earning a cent.

That way, you risk $1,500 with either strategy. Again remember that you will lose money on slippage and fees when exiting those ITM legs, so you would be risking more than the OTM if using the same quantity.

Good stuff, will download it right away. Anything else you can recommend please forward. What are your thoughts OptionVue?

Click to expand...

I trialled OptionVue and it was a bit clunky for my liking. But why pay thousands when you can get basic Hoadley for free and the paid version comes at an annual cost - although it continues to work after 12 months, but you don't get any more upgrades. I usually upgrade Hoadley every couple of years. If comparing between Hoadley and OV, they do have different features, so I guess it depends on what you want.

Anyway, here is the link to the Hoadley site: http://www.hoadley.net/options/options.htm
and to the OSET page: http://www.hoadley.net/options/strategymodel.htm
Lots of info in the site including demos etc. It is very educational.

When you set up your OSET - just make sure you have all the imputs correct.