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:

1. Buy a Call Option (Out of the Money):

   • Strike Price: $3200

   • Premium Paid: $180

2. Buy a Put Option (Out of the Money):

   • Strike Price: $2800

   • Premium Paid: $150

Execution and Potential Outcomes

1. 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

2. 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).