Strangle Options Strategy

The Strangle is a volatility-driven options strategy that profits from large price movements in either direction. It involves buying or selling a call and a put option with different strike prices but the same expiration date. Traders use strangles when they expect significant movement but are uncertain about the direction.

Structure

• Long Strangle: Buy 1 OTM call + Buy 1 OTM put
• Short Strangle: Sell 1 OTM call + Sell 1 OTM put
• Both options share the same expiration date

Profit & Loss Profile

• Long Strangle: Unlimited upside potential; max loss = total premium paid
• Short Strangle: Limited profit (premium received); unlimited risk if price moves sharply
• Breakeven Points: Lower strike - total premium and Upper strike + total premium

Ideal Market Conditions

• Use long strangle when expecting high volatility (e.g., earnings, FDA decisions)
• Use short strangle in low-volatility, range-bound markets

Example

A stock is trading at $100. You buy:

• 1 call option at $105 strike for $2
• 1 put option at $95 strike for $2

Total cost = $4. Breakeven = $109 (upside) and $91 (downside). Profit occurs if the stock moves beyond either breakeven point.

Risks & Considerations

• Time decay erodes long strangle value
• Short strangles carry assignment risk and require margin
• Success depends on magnitude of price movement, not direction