Glossary term
Strangle
A strangle is an options strategy that combines a call and a put on the same underlying asset with different strike prices and the same expiration.
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What Is a Strangle?
A strangle is an options strategy that combines a call and a put on the same underlying asset with different strike prices and the same expiration date. A long strangle buys both options. A short strangle sells both options.
Long strangles are usually used when an investor expects a large move but is uncertain about direction. Short strangles are generally used when an investor expects the underlying to stay within a range. Both versions depend heavily on volatility, time, and the distance between the strike prices.
Key Takeaways
- A strangle uses a call and put with different strikes and the same expiration.
- A long strangle seeks a large move in either direction.
- A short strangle collects premium but can carry substantial risk.
- Compared with a straddle, a strangle usually costs less to buy but needs a larger move.
Long and Short Versions
The long version is a debit strategy: the investor pays for both options. The short version is a credit strategy: the investor receives premium for selling both options. The payoff profile is very different depending on which side of the trade the investor takes.
Version | Setup | General Outlook | Main Tradeoff |
|---|---|---|---|
Long strangle | Buy an out-of-the-money call and put. | Large move in either direction. | Lower cost than a straddle, but wider breakeven points. |
Short strangle | Sell an out-of-the-money call and put. | Price stays between the strikes. | Premium income, but large loss potential outside the range. |
Strike Distance and Breakeven
A strangle's strike prices create a range. For a long strangle, the underlying must move beyond that range by enough to overcome the total premium paid. For a short strangle, the seller generally wants the underlying to remain between the strikes so both options expire worthless or lose value.
Wider strikes can reduce the initial cost for a long strangle or reduce the premium received for a short strangle. Narrower strikes can make the position more sensitive to smaller price moves but may increase cost or risk.
Strangle Versus Straddle
A straddle uses the same strike price for the call and put. A strangle uses different strikes. That difference makes the strangle cheaper to buy in many cases, because both options are often out of the money when opened. The tradeoff is that the underlying needs a larger move before the position becomes profitable.
For short sellers, a strangle may provide a wider range of profitable prices than a short straddle, but the risk outside that range can still be substantial.
The Bottom Line
A strangle is a volatility strategy built from a call and a put with different strike prices. It can be used to trade a large expected move or a quiet range, but the premium, strike distance, and time remaining determine whether the position works.