Long Strangles (usually known as just 'strangles') are a Non-Directional Options Strategy where an Out Of The Money Call Option and Put Option are both purchased. Strangles can generate unlimited profits which can potentially be very large if there is a significant movement in the Underlying asset or commodity. As such they are considered Long Vega trades because they benefit from an increase in Volatility.
Strangles are debit trades and have defined risk limited to the cost needed to buy both put and call Options. Since both put and call sides are Out Of The Money, the unlimited profit potential and defined risk means they have a lower probability of success.
Strangles are similar to Straddle strategies, however, the latter is composed of two At The Money put and call Options which means they have a higher probability of being successful (which is offset by reduced profit potential).
As with Straddle option strategies, it is possible to sell a Short strangle also.
Example
The stock is trading at 205
Buy 1 x 210 Strike Call For 0.486 Debit
Buy 1 x 200 Strike Put For 0.454 Debit
Net Debit = -(0.94)
At Expiration, the stock is still trading at 205
1 x 210 Call expires worthless
1 x 200 Put expires worthless
Net = -(0.94)
Loss = $94
At Expiration, the stock is trading at 190
1 x 210 Call expires worthless
1 x 200 Put is worth 5.0
Debit to enter position = 0.94
Net: 5 - 0.94 = 4.06
Profit = $406
Contributed by: Ralph Windsor
Strangles are debit trades and have defined risk limited to the cost needed to buy both put and call Options. Since both put and call sides are Out Of The Money, the unlimited profit potential and defined risk means they have a lower probability of success.
Strangles are similar to Straddle strategies, however, the latter is composed of two At The Money put and call Options which means they have a higher probability of being successful (which is offset by reduced profit potential).
As with Straddle option strategies, it is possible to sell a Short strangle also.
Strangle Diagram
Example
The stock is trading at 205
Buy 1 x 210 Strike Call For 0.486 Debit
Buy 1 x 200 Strike Put For 0.454 Debit
Net Debit = -(0.94)
At Expiration, the stock is still trading at 205
1 x 210 Call expires worthless
1 x 200 Put expires worthless
Net = -(0.94)
Loss = $94
At Expiration, the stock is trading at 190
1 x 210 Call expires worthless
1 x 200 Put is worth 5.0
Debit to enter position = 0.94
Net: 5 - 0.94 = 4.06
Profit = $406
Related Directory Entries
External Links
Long Strangle Option Strategyhttp://www.optionstradingiq.com/long-strangle-option-strategy/
In-depth article by Gavin McMaster about Long Strangles, including using technical analysis and chart patterns to identify potential scenarios where they may be a suitable strategy to employ.
View Options Trading IQ in Options Market Glossary Directory
Adjusting a Strangle to Lock In Profitshttp://straddles.optionetics.com/article.aspx?ID=15772
Jay Kaeppel from Optionetics.com describes strategies for adjusting strangle trades to increase your probability of success.
Straddles and Strangleshttp://www.optionmonster.com/education/straddles_and_strangles.php
Option Monster article about Straddles and Strangles.
Straddles and Strangles (Risk Reversal)http://www.riskreversal.com/education/straddlesandstrangles/
Risrkeversal.com article about Straddles and Strangles.
Long Stranglehttp://www.theoptionsguide.com/long-strangle.aspx
Options Guide article about long strangles.
View Options Guide Strategy Finder in Options Market Glossary Directory
Optionetics Trading Strategieshttp://straddles.optionetics.com/straddles.aspx
Optionetics articles on Straddles and Strangles.
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