Dear all,I apologize first if my question below sounds silly to some of you.I am currently drafting an article on option trading, in particular the "American Strangle options".I understand the strangles are widely used for volatility trade, but was wondering what are their exercise types?Since a strangle can produce positive payoff if a market moves significantly (either upward or downward), I guess it may be widely used by hedge funds. But I simply can not find any information of its practical use, especially the American types. Below is an article I found related to this, but it does not provide enough information for my writing.http://www.optionseducation.org/content ... e_2.pdfCan anyone or a practitioner can talk a bit of the use of American strangles in the trading office?Or maybe guide me to somewhere with more trading information on the options of American types?I will appreciate your help with this situation.Cheers,TextText

Is there anyone who can kindly help?

Leon,have you tried nuclearphynance.com and maybe some open source projects like opengamma.com?

QuoteI understand the strangles are widely used for volatility tradeYes, straddles and strangles are widely used for volatility trade. Usually they are delta-hedged, that is you would also have some exposure to the underlying and you would adjust that from time to time to keep the overall delta near zero.But I don't understand the question about the exercise type.The two index option exchanges I am most familiar with are the CBOE and the CME. The strangle is just the combination of a call and a put with same maturity. They may be quoted at a single price but they are still two separate options.On the CBOE, options are European exercise. If I wanted to construct a strangle I would buy/sell a European call and a European put.On the CME on the other hand options are American exercise. So I would combine an American call with an American put.So it can be done either way.Feel free to specify your question in more detail. (In particular what do you mean by an "American strangle").

this book has a chapter on strangles and straddles, about 25 pages.Options Trading: The Hidden Reality

Dear all,Many thanks for your reply first.I have also checked with a consultant at Options Industry Council (OIC).As Acastaldo mentioned, most strangles and straddles are actually the portfolio of owning a put (at lower exercise price) and a call (at a higher strike price) at the same time with an identical expiry restriction. I also noticed that there exist both European and American strangles traded in OTC markets.However, the type of strangle options mentioned above seem not making any sense to me.If a long strangle position is of European type, then its value is simply the sum of its European put and call counterparts.However, if it is of American type, then the so-called strangle option allows its owner to exercise the put and call parts at different time points in his best interest.But imagine that, say I am a trader expecting a significant movement of asset price but unsure of its direction (either upward or downward).I may only need another type of American strangle which gives me only the one-off right (either to sell or to buy at most one time in my best interest) and should cost cheaper than the strangle composed of a put and a call. Such an option should be more attractive than the traditional strangles widely traded in the OTC markets.However, I simply can not find any trading information on this second type of strangles.In the real world, can a trader or a hedge fund manager buy such an one-off-exercise strangles (the 2nd type)?If so, where can one buy it?If not, why do companies not write the 2nd type kind of strangle but simply used the term 'strangle' referring to the combination of a put and call?It's really weird to me!

Congratulations, you have invented a new product. However, as with most ideas like this, there is no advantage or other rationale I can see that would justify bringing the product into existence let alone into common use. If you find you have an American option that you don't need any more (because you have exercised the other side of the strangle) just sell it.

I still dont understand why it can not be traded.It can be priced by Monte Carlo or using the pricing method derived in''Evaluation of American strangles [2005]' by Chiarella. Besides, even though a trader can sell the remaining right (either a put or a call) after the first-time exercise of the traditional American traditional strangle, it's actually some right the trader does not need when buying this contract. In this case, the trader was forced to buy an extra unnecessary right when he only needs to hedge against a significant but uncertain movement of asset price.Moreover, in an OTC market, there are lots of derivatives tailor-made. So, why can this one not be traded?And dont forget, if we sell the extra right afterwards, we needs to pay its transaction cost in a real market.It simply does not make any sense to me.

QuoteOriginally posted by: LeonAtWilmottI still dont understand why it can not be traded. Besides, even though a trader can sell the remaining right (either a put or a call) after the first-time exercise of the traditional American traditional strangle, it's actually some right the trader does not need when buying this contract. In this case, the trader was forced to buy an extra unnecessary right when he only needs to hedge against a significant but uncertain movement of asset price.Will the buyer specify which option (call or put) right he needs , when he buys the strangle?

No, the buyer specifies that he wants an "American Strangle of Leon Type" with two strikes Kc and Kp (with Kc >= Kp)At any time (up to or before T) the buyer can exercise and receive Max(S-Kc,0)+Max(Kp-S,0) As usual once exercised the option is cancelled (i.e. you can't exercise again). Note that only one (at most) of the terms in the payoff can be nonzero. This option is not the same as a European strangle and also not the same as a "bi- American strangle" composed of an American put and American call.

Maybe it is more appropriate to refer to them as American bi-option and uni-option strangle contracts, respectively.

QuoteOriginally posted by: acastaldoNo, the buyer specifies that he wants an "American Strangle of Leon Type" with two strikes Kc and Kp (with Kc >= Kp)What is the price of this Strangle? Based on my understanding, the OP wants to pay the price of the call or put but not both.

If it's an American bi-option strangle, then its value is the sum of its American put and call counterparts.If it's an American uni-option strangle, then the value is less than the sum.For American put, call and uni-option strangles, we can always find their values by simulation methods or using numerical solution to a PDE derived from a financial model.Please refer to ''Evaluation of American strangles [2005]' by Chiarella' for pricing the American uni-option strangle contracts using the PDE approach.