Trading a Long Strangle Strategy in Major Tech Stocks

Trading a Long Strangle Strategy in Major Tech Stocks

Palo Alto Networks (PANW) has been trading in a tight range for about a month. This could mean it’s a good time to consider a long strangle trade in Palo Alto stock and a possible range breakout.




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A long strangle is constructed by purchasing an out-of-the-money call and put.

The trade aims to take advantage of a significant movement in either direction in the underlying stock.

Palo Alto Stock Today: The Trade Setup

Purchasing a long choke costs less than purchasing a long straddle, but will still suffer from weather degradation. This means that options will lose a little value with each passing day if Palo Alto stock doesn’t make a big move.

In the case of an extended strangle, the longer the trade extends in time, the slower the time decay. However, options become more expensive and require more capital.

For Palo Alto stock, traders could form a long strangle by purchasing a 330-strike call option and a 250-strike put option for the May 17 expiration. The monthly call option was trading around $3.30 and the put was trading around $2.40, based on recent prices. When you add the two together, the cost comes to about $5.70 per set of contracts, or $570 for a block of 100 shares.

A fixed maximum risk

This is the total amount of risk in the transaction and the maximum that could be lost.

Calculate equilibrium prices by taking the strike price plus or minus the cost of the strangle.

This gives us equilibrium prices of 244.30 and 335.70 for Palo Alto stock. But traders can make profits with a smaller move if the move occurs earlier in the trade.

For example, the estimated equilibrium prices on April 15 are around 261 and 305.

Changes in implied volatility will have a significant impact on this transaction and intermediate equilibrium prices. It is therefore important to have a solid understanding of volatility before placing a trade like this.

Palo Alto Stock: Best and Worst Scenarios

The ideal scenario is a significant move in either direction within the first week or two of trading.

Worst case scenario with this long choke? A stable stock price that would see call and put options on Palo Alto stock slowly lose value each day. For a long period of time, I usually set a stop loss at around 20% of the capital at risk, which would be around $110 and a profit target of around 40%.

I also wouldn’t keep the trade going any longer than April 15th.

According to Checking ITN stocksPalo Alto stock ranked No. 8 in its group and has a Composite score of 90, one EPS rating of 98 and one Relative Strength Rating of 70.

Remember that options are risky and investors can lose 100% of their investment.

This article is intended for educational purposes only and does not constitute a commercial recommendation. Remember to always do your due diligence and consult your financial advisor before making any investment decisions.

Gavin McMaster holds a master’s degree in applied finance and investment. He specializes in income trading using options, is very conservative in his style and believes that patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ

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