To: Flagrante Delictu who wrote (12633 ) 12/16/1997 2:47:00 PM From: Flagrante Delictu Read Replies (3) | Respond to
strangle, on the other hand is a combination where you would buy a put at a strike price that was above the current market price of the intended stock, such as a purchase of the Dec. 15 put on LGND, whose last trade was at 1.82. This put would have the same expiration date as the call you would purchase, which call would have a strike price below the current price of LGND . So, in this case you would buy the Dec. 12.5 call whose last price as I write this is 1.06. You have now strangled the market in LGND. YOu have paid 2.88 for what can be worth no less than 2.50 at expiration. no matter what price LGND closes as on expiration, your strangle will be worth 2.50 or better. Where your opportunity lies in this strangling scenario is if LGND closes above 15 or below 12.5 on expiration. Since you have alredy strangled 2.50 out of the market by the very act of setting up this strangle at a cost of 2.88, any close above 15 or below 12.5 is additional money in your pocket. E.g. If Henry wins the wine from Andy by virtue of a close at 20, you make 5.00 above the 2.50 you have locked in. Namely, you get back 7.50 for the 2.88 you spent. on the other hand, if tonyt is correct & LGND closes at 10.00 on expiration, you have made an additional 2.50 to go with the 2.50 you have already locked in {strangled] out of the marketplace. Therefore, a close at 10.00 on LGND would return $5.00 to you for your expense of $2.88, resulting in a profit of $2.12 before commissions. When you buy this strangle you take a 38 cent risk for a chance {remote as it may seem} that either tontyt or Henry knows "something" about where LGND will close on expiration. Of course, you can close out your position before expiration, should you so choose. Lastly, instead of buying the strangle you could buy a box. I can hear the shreiks of the politically correct in the distance. If you bought a box, you could do so by first buying the strangle in LGND for !0.88 and then selling what are called the wings. Specifically, having bought the strangle in LGND that we discussed, you would then sell the Dec.15 call last trade at 18 cents and the Dec 12.5 put { last traded at twenty five cents} & you would receive forty three cents in total for having sold these 2 options. Your cost was !2.88 & at expiration you receive 12.50 plus forty three cents for a profit of a nickle before commissions.
