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 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.

Breaking Down the 'Strangle'

Strangles come in two forms: long and short. 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.

Conversely, 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.

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.

Strangle Example

A stock is currently trading at $50 a share. To employ the strangle option strategy, a trader enters into two option positions, one call and one put. The call has a strike of $52 and the premium is $3, for a total cost of $300 ($3 x 100 shares). The put option has a strike price of $48 and the premium is $2.85, for a total cost of $285 ($2.85 x 100 shares). Both options have the same expiration date.

If the price of the stock stays between $48 and $52 over the life of the option, the loss to the trader will be $585 which is the total cost of the two option contracts ($300 + $285).

The trader will make money if the stock moves well beyond the respective strike prices. If the price of the stock ends up at $40, the call option will expire worthless, and the loss will be $300 for that option. The put option, however, has gained value, and produces a profit of $715 ($1,000 less the initial option cost of $285) for that option. Therefore, the total gain the trader has made is $415 ($715 profit - $300 loss).

If the price rises to $55, the put option expires worthless and incurs a loss of $285. The call option brings in a profit of $200 ($500 value - $300 cost). When the loss from the put option is factored in, the trade totals a loss of -$85 ($200 profit - $285 loss). The price move wasn't large enough to compensate for the cost of the options. 

RELATED TERMS
  1. Long Straddle

    A long straddle is an options strategy with the purchase of both ...
  2. Stock Option

    Stock options give the holder the right to buy or sell shares ...
  3. Option

    Options are financial derivatives that give the option buyer ...
  4. Call On A Put

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

    A covered straddle is an option strategy that seeks to profit ...
  6. Deep Out Of The Money

    An option is deep out of the money if its strike price is significantly ...
Related Articles
  1. Trading

    4 Popular Options Strategies for 2016

    Learn how long straddles, long strangles and vertical debit spreads can help you profit from the volatility that stock analysts expect for 2016.
  2. 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.
  3. Trading

    Profit On Any Price Change With Long Straddles

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

    Beginners Guide To Options Strategies

    Find out four simple ways to profit from call and put options strategies.
  5. Trading

    Option trading strategies: A guide for beginners

    Options offer alternative strategies for investors to profit from trading underlying securities. Learn about the four basic option strategies for beginners.
  6. Trading

    The Basics of Options Profitability

    Learn the various ways traders make money with options, and how it works.
  7. Trading

    Options Strategies for Your Portfolio to Make Money Regularly

    Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
  8. Trading

    Trading Options on Futures Contracts

    Futures contracts are available for all sorts of financial products, from equity indexes to precious metals. Trading options based on futures means buying call or put options based on the direction ...
  9. Trading

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
RELATED FAQS
  1. Is it possible to trade forex options?

    Yes. Options are available for trading in almost every type of investment that trades in a market. Most investors are familiar ... Read Answer >>
  2. When holding an option through expiration date, are you automatically paid any profits, ...

    Holding an option through the expiration date without selling does not automatically guarantee you profits, but it might ... Read Answer >>
  3. 4 Ways to Trade Options

    Without a good understanding of option trading, terms like "buy to open", "sell to open", "buy to close", and "sell to close" ... Read Answer >>
  4. What Happens to Call Options If a Co. is Bought?

    Typically, the announcement of a buyout offer by another company is a good thing for shareholders. Read Answer >>
Trading Center