There is no definitive answer to this question, as the best time to buy and sell strangle in Singapore will vary depending on many factors. However, by understanding the key considerations that affect when to buy and sell strangles, you can make more informed decisions when trading these options strategies. This article explores some of the most important factors to keep in mind when trading strangles in Singapore.
The underlying asset’s price movement
The first and arguably most important factor to consider when trading strangles is the underlying asset’s price movement. If the underlying asset is not moving enough, then it is unlikely that either the call or the put option will expire in the money, and the trader may incur a loss.
Conversely, if the underlying asset price moves too much, then there is a risk that both options will expire in the money, and the trader may also incur a loss (albeit a smaller one). Thus, it is crucial to understand the underlying asset’s price movement before trading strangles.
Volatility
Another critical factor to consider when trading strangles is volatility. If the market is highly volatile, there is a greater chance that either the call or the put option will expire in the money.
On the other hand, if the market is not volatile enough, it is less likely that either option will expire in the money. Thus, traders should always consider volatility when trading strangles.
Time
Another important factor to consider when trading strangles is time. The longer the time to expiration, the greater the chance that either the call or the put option will expire in the money.
However, if the options are close to expiration, there is a greater chance that both options will expire out-of-the-money, and the trader may incur a loss. Thus, it is crucial to consider the time when trading strangles.
Strike prices
Another factor to consider when trading strangles is the strike prices of the options. If the strikes are too close to the underlying asset’s price, then there is a greater chance that both options will expire out-of-the-money.
Conversely, if the strike prices are too far away from the underlying asset’s price, then there is a greater chance that both options will expire in the money. Thus, it is vital to choose strike prices appropriate for the underlying asset’s price movement and volatility.
Risk appetite
Another factor to consider when trading strangles is risk appetite. Strangles are a relatively risky strategy and are not suitable for all traders. Some traders may be more risk-averse and prefer to trade straddles instead. Straddles are like strangles, but both options have the same strike price. It means that there is less risk as the trader only needs the underlying asset to move to make a profit.
Conversely, other traders may be more aggressive and prefer to trade strangles over straddles as they offer a higher potential return. It is essential to understand your risk appetite before trading any options strategy.
Trading costs
Another factor to consider when trading strangles is trading costs. Strangles can be costly to trade as they involve buying both a call and a put option. Thus, it is crucial to consider the options’ cost and the broker’s commission fees when trading strangles.
Exit strategy
It is also essential to have an exit strategy when trading strangles. It is because strangles are a relatively risky strategy and can incur losses if not managed properly.
Some exit strategies that traders can use include stop-loss orders and profit-taking orders. Stop-loss orders help to limit losses by exiting the trade if the underlying asset price moves against the trader’s position. Profit-taking orders help to lock in profits by exiting the trade if the underlying asset price moves in the trader’s favour.
Plan
Last, it is crucial to have a plan when trading strangles. It includes having a defined risk appetite, understanding the underlying asset, choosing appropriate strike prices, and having an exit strategy. A plan helps to keep traders disciplined and prevents them from making impulsive decisions that may incur losses.
When done correctly, trading can be a profitable strategy. However, it is essential to consider all the above factors before entering any trade.
Conclusion
To sum up strangles are a type of options trade that involves buying both a call and a put option with different strike prices. Strangles are a relatively risky strategy and are not suitable for all traders.
Some key factors to consider when trading strangles include the underlying asset’s price movement, volatility, time to expiration, strike prices, and risk appetite. It is also essential to have an exit strategy in place to manage losses.
