In this article, we will explore the best time to buy and sell strangle in the UK. It is an essential question for all traders looking to maximise their profits. We will analyse historical data to see how prices have behaved during different times.
To learn more about listed options and how they are traded, you can visit Saxo Bank.
What is a strangle, and how does it work?
Before answering the question of when is the best time to buy and sell strangle, we need first to understand what a strangle is. It is an options trading strategy that involves buying both a put option and a call option on the same underlying asset. The trader buys these options with different strike prices but with the same expiration date.
The beauty of this strategy is that it doesn’t matter which direction the market moves; the trader will still make a profit if the price moves enough in either direction. It gives the trader a more comprehensive range of price movement to work with and increases the chances of making a profit.
The best time to buy and sell strangles
Now that we know what a strangle is, let’s look at the best time to buy and sell one.
The best time to buy a strangle is when there is high implied volatility. Implied volatility is the expected price movement of an asset over a certain period. When there is high implied volatility, there is a greater chance of the price moving in a large enough direction to make a profit.
One way to measure implied volatility is using the CBOE Volatility Index (VIX). The VIX measures the level of put options and call options traded on the S&P 500 index. When the VIX is high, there is a lot of activity in the options market, and traders expect a significant price movement.
Another way to measure implied volatility is using the Standard Deviation (SD). SD measures how much an asset’s price has moved over a certain period, and a higher SD means that the asset’s price has been moving more erratically and is thus more volatile.
The best time to sell a strangle is low implied volatility, and it is because the chances of the price moving in a large enough direction to make a profit are lower. Implied volatility and the VIX tend to be cyclical, meaning that they go through periods of highs and lows. Thus, the best time to buy a strangle is when implied volatility is low, and the best time to sell a strangle is when implied volatility is high.
Remember that you don’t have to wait for implied volatility to reach its peak to sell your strangle. You can also sell your strangle when implied volatility declines from its highs.
Factors to consider when trading strangles
Now that we’ve answered the question of when the best time to buy and sell strangles is, let’s look at some other factors you need to consider when trading this strategy.
The first factor is your risk tolerance. This strategy is not for everyone as it can be pretty risky. Remember, you are buying both a put option and a call option, which means you are effectively doubling your risk. Strangling may be a good strategy if you are comfortable with this level of risk. However, if you are risk-averse, you may want to consider another options trading strategy.
Additionally, it helps if you consider your time horizon. This strategy works best when expecting a significant price movement within a short period. If you are patient and can wait for the market to move, then this may not be your best strategy.
Another factor to consider is your broker. Not all brokers offer options trading, and not all brokers offer strangles. Make sure that your broker offers both before you decide to trade this strategy. Additionally, is the liquidity of the options you are buying. The liquidity of an option is the measure of how easy it is to buy or sell the option.
Highly liquid options tend to have tight bid-ask spreads, which means there is no significant difference between the prices that buyers and sellers are willing to trade at. On the other hand, illiquid options have wide bid-ask spreads, and it can be challenging to find a buyer or seller willing to trade at your desired price.
You want to ensure that you are trading options that are highly liquid so that you don’t get stuck in a position you can’t get out of. The last factor to consider is your commission. When buying and selling options, you have to pay a commission to your broker, which is a fee that your broker charges for each trade you make. Make sure you consider commissions when trading strangles, as they can eat your profits.
