What is a Strangle? | Options Trading Strategies | Combining Options
What is a Strangle? Options Trading Strategy - Options Combinations
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What is a Strangle?
A strangle is an options strategy where the investor holds a position in both a call and put with different strike prices, but with the same expiration date and underlying asset. This option strategy is profitable only if the underlying asset has a large price move. This is a good strategy if you think there will be a large price movement in the near future but are unsure of which way that price movement will be.
What is Long Strangle?
A long strangle is simultaneously buying an out of the money call and an out-of-the-money put option. This strategy has a large profit potential, since the call option has theoretically unlimited profit if the underlying asset rises in price, and the put option can profit if the underlying asset falls. The risk on the trade is limited to the premium paid for the two options.
What is a Short Strangle?
A short strangle is a neutral strategy and has limited profit potential. The maximum profit is equivalent to the net premium received for writing the two options, less any trading costs. A short strangle is selling an out of the money call and an out of the money put option.
What is the Difference Between Strangle and Straddle?
Long strangles and long straddles are similar options strategies that allow investors to gain from large potential moves to the upside or downside. However, a long straddle involves simultaneously purchasing at the money call and put options.
A short straddle is similar to a short strangle and has a limited maximum profit potential that is equivalent to the premium collected from writing the at the money call and put options.
Buying a strangle is generally less expensive than a straddle as the contracts are purchased out of the money. The counter-argument to this is that since the options are out of the money, the underlying will need to make a larger price move in order for the strategy to create a profit.
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