Strategy Example with Option Protocol
Strangle Strategy
A strangle strategy involves buying an out-of-the-money call option and an out-of-the-money put option with the same expiration date but different strike prices.
Let's assume the current spot price of Ethereum (ETH) is $3000. Alex, the trader, decides to implement a strangle strategy using options:
Buy a Call Option (Out of the Money):
Strike Price: $3200
Premium Paid: $180
Buy a Put Option (Out of the Money):
Strike Price: $2800
Premium Paid: $150
Execution and Potential Outcomes
Initial Position:
By buying the call option, Alex pays a premium of $180.
By buying the put option, Alex pays a premium of $150.
Total Premium Paid: $180 + $150 = $330
Possible Outcomes at Expiration:
ETH Price Above $3200:
The call option becomes profitable. The profit from the call option is calculated as (ETH price - $3200 - $180), accounting for the premium paid.
The put option expires worthless.
Net Profit = (ETH Price - $3200 - $180) - $150 (premium for put).
ETH Price Below $2800:
The put option becomes profitable. The profit from the put option is calculated as ($2800 - ETH price - $150), accounting for the premium paid.
The call option expires worthless.
Net Profit = ($2800 - ETH Price - $150) - $180 (premium for call).
ETH Price Between $2800 and $3200:
Both options expire worthless.
Net Loss = Total Premium Paid = $330.
Risk and Reward
Max Profit: The maximum profit is limited to the total premium received, which is $330.
Max Loss: The potential loss can be substantial if ETH's price moves significantly beyond the breakeven points ($3530 on the upside and $2470 on the downside).
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