It is trying to understand the market behavior for an investment to succeed. Strangle investment can make you earn to risk ratio up to 10 or more if implemented at the perfect time.
A strangle is a non-directional trade that gives a high reward; however, it also has a higher risk. Timing is everything in investing and trading; therefore, understanding when to buy your strangles is an essential part of trading success.
Suppose there is no major news or volatility around a particular currency pair leading up to expiry. In that case, this means that everything has been priced in already, so it would be unlikely that anything significant could move the price either upwards or downwards before expiry. It would result in little change from where they were purchased at. Therefore, the strangle would expire worthlessly.
If there was volatility or significant news events, then this means that there has not been enough time for the market to price these changes in so they could well move to levels unseen before expiry. It is why buying a strangle at low points could generate high returns (and vice versa).
The forex market closes Friday night and reopens Sunday night; all other markets are closed during this period. There is no central marketplace where currencies are traded; instead, transactions occur over-the-counter (OTC) through brokers who act as market makers by providing bids and offers. Consequently, exchange rates vary between brokers – from 0.1to 0.5 pips for major currencies.
Profit or loss
Your profit or loss in forex is determined by the difference in exchange rates when you enter into a trade and when you exit that trade. Forex brokers allow traders to deal in contracts for differences (CFDs). CFD trading allows speculators to buy/sell an asset without owning it. These trades are executed using leverage, which magnifies your returns if the price moves in your favor and increases your losses if the market move against you.
Your margin deposit required before opening a position depends on the type of account you have opened with your broker – the bigger the account, the lower your margin deposit is.
Forex has undergone tremendous development in recent years in response to the growth of electronic trading. Currencies are traded electronically on a 24/5 schedule in what is known as foreign exchange market sessions.
When to buy
A trader can buy or write a strangle anytime before expiration for a profit but usually does so when implied volatility is low. The strangle is very cheap due to the narrow price range of the underlying security.
When buying an option, it’s typically best to wait for implied volatility levels to reach their lowest point before purchasing one of two contracts because these will generally be cheaper than calls or puts with high IV. A trader may also want to purchase a strangle during earnings season because common event-driven trading strategies often involve trading on either side of this special event.
When to sell
You’ll want to sell a strangle after major news hits that suggest economic problems are getting worse. Once IV has hit high levels, you would attempt to write a call option with a strike price below the underlying asset’s current market price and a put option with a strike price above the current market price.
Given that there is enough time until expiration, you’d be able to collect a significant amount of premium as both options should now have premiums that are much higher than those collected when selling typical out-of-the-money options. Time decay would work against your favor, so it’s essential to purchase only option contracts with strike prices that you’re ready and willing to own if implied volatility remains elevated or continues to rise.
Only consider them if there is likely to be an underlying movement from which you can profit – otherwise, you will end up losing money on a worthless investment. If there isn’t any underlying movement and volatility is expected to remain flat before option expiration.