Loading the player...

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 maturity and underlying asset. This option strategy is profitable only if there are large movements in the price of the underlying asset. 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.

BREAKING DOWN 'Strangle'

The long strangle strategy involves simultaneously buying an out-of-the-money call and an out-of-the-money put option. A long strangle theoretically has an unlimited profit potential because it involves purchasing a call option. Conversely, a short strangle is a neutral strategy and has limited profit potential. The maximum profit that could be achieved by a short strangle is equivalent to the net premium received less any trading costs. The short strangle involves selling an out-of-the-money call and an out-of-the-money put option.

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 an at-the-money call and an in-the-money put option. 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. Therefore, a strangle is generally less expensive than a straddle as the contracts are purchased out of the money.

Strangle Example

For example, imagine a stock currently trading at $50 a share. To employ the strangle option strategy, a trader enters into two option positions, one call and one put. Say the call is for $55 and costs $300 ($3.00 per option x 100 shares) and the put is for $45 and costs $285 ($2.85 per option x 100 shares). If the price of the stock stays between $45 and $55 over the life of the option, the loss to the trader will be $585 (total cost of the two option contracts). The trader will make money if the price of the stock starts to move outside the range. Say that the price of the stock ends up at $35. The call option will expire worthless, and the loss will be $300 to the trader. The put option, however, has gained considerable value, and it is worth $715 ($1,000 less the initial option value of $285). Therefore, the total gain the trader has made is $415.

RELATED TERMS
  1. Iron Butterfly

    An iron butterfly is a options strategy created with four options ...
  2. Straddle

    An options strategy in which the investor holds a position in ...
  3. Currency Option

    A contract that grants the holder the right, but not the obligation, ...
  4. In The Money

    1. For a call option, when the option's strike price is below ...
  5. Call On A Put

    A call on a put refers to a compound option where there is a ...
  6. Covered Straddle

    An option strategy that involves writing the same number of puts ...
Related Articles
  1. Trading

    How To Profit From Volatility

    We explain four key strategies to profit fom volatility in markets.
  2. Trading

    Profit From Earnings Surprises With Straddles And Strangles

    These option strategies allow traders to play on earnings announcements without taking a side.
  3. Trading

    Options Strategies That Profit From Rite Aid's Volatility

    Learn why options strategies such as the long straddle and the long strangle enable investors to make big money with Rite Aid and other volatile stocks.
  4. Trading

    Profit On Any Price Change With Long Straddles

    In this strategy, traders cash in when the underlying security rises - and when it falls.
  5. Trading

    Trading Volatility? Don’t Trade Stocks, Trade Options

    During times of volatility, traders can benefit greatly from trading options rather than stocks. We explain why.
  6. Trading

    Stock Options: What's Price Got To Do With It?

    A thorough understanding of risk is essential in options trading. So is knowing the factors that affect option price.
  7. Trading

    Collecting Option Premium In The Grain Market

    Believe it or not, there are some great income-generating strategies that are lower in risk.
  8. Trading

    Using Options To Pay Off Debt

    We tell you about four option strategies that could provide a way to pay off your debt.
  9. Trading

    Straddle Strategy: A Simple Approach to Market Neutral

    Being both short and long has advantages. Find out how to straddle a position to your advantage.
RELATED FAQS
  1. What options strategies are best suited for investing in the retail sector?

    Learn how savvy investors employ options strategies such as the long straddle and long strangle to profit from the volatile ... Read Answer >>
  2. What's the difference between a straddle and a strangle?

    Straddles and strangles are option strategies that take advantage of significant moves up or down in a stock's price. Learn ... Read Answer >>
  3. What options strategies are best suited for investing in the financial services sector?

    Learn the options strategies top traders use to take advantage of the volatility in the financial services sector and the ... Read Answer >>
  4. What option strategies can I use to earn additional income when investing in the ...

    Learn about a couple of good options strategies that traders can use to enhance investing profitability when investing in ... Read Answer >>
  5. Are there any risks involved in trading put options through a traditional broker?

    Explore put option trading and different put option strategies. Learn the difference between traditional, online and direct ... Read Answer >>
  6. When does one sell a put option, and when does one sell a call option?

    An investor would sell a put option if her outlook on the underlying was bullish, and would sell a call option if her outlook ... Read Answer >>
Hot Definitions
  1. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  2. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  3. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  4. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  5. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  6. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
Trading Center