Let's hypothesize about how a long-term strangle options play on DirecTV (DTV) could work.
One options investor is looking for shares in DTV to remain range-bound through expiration in January 2012.
It looks like the trader initiated a long strangle, selling 5,000 calls at the January 2012 $45 strike for a premium of $1.90 each; selling the same number of puts at the lower January 2012 $35 strike at a premium of $2.25 apiece; and pocketed on the strangle amounts a gross premium of $4.15 per contract
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The investor keeps the full amount of premium received on the transaction as long as shares in DTV trade within the boundaries of the strike prices described through expiration day in just over one year's time. The strangle-seller may take profits off the table by buying back the position at some future date ahead of expiration.
The long-dated contracts have a great deal of time value priced into the premium received by the investor today. The cost of buying back the strangle will fall as time erodes, and the trader may be able to close out the position profitably before the contracts expire in 2012.
The short stance in both call and put options could result in losses to the investor, however, if DTV's shares rally above the upper breakeven price of $49.15, or if shares slip beneath the lower breakeven point at $30.85 ahead of expiration.