A strangle is an options strategy that combines two options on the same underlying asset: a call and a put with the same expiration date but different strike prices. Traders use a strangle when they expect a large price movement but do not know whether the asset will rise or fall.
Strangle Options Strategy at a Glance
| Feature | Long strangle | Short strangle |
|---|---|---|
| Position | Buy an out-of-the-money call and put | Sell an out-of-the-money call and put |
| Market outlook | Large move in either direction | Price stays within a range |
| Maximum profit | Unlimited upside profit; substantial downside profit | Limited to the premium received |
| Maximum loss | Limited to the premiums paid | Unlimited upside risk and substantial downside risk |
| Effect of rising implied volatility | Usually helps | Usually hurts |
| Effect of time decay | Usually hurts | Usually helps |
How Does a Long Strangle Work?
A long strangle involves buying an out-of-the-money call and an out-of-the-money put with the same expiration date. The call has a higher strike price than the put. The strategy can profit if the underlying asset rises above the call strike or falls below the put strike by enough to cover the premiums paid.
Long Strangle Example
Assume XYZ stock trades at $100:
- Buy a $105 call for $3
- Buy a $95 put for $2
- Total premium paid: $5 per share
The long strangle has:
- Upper breakeven: $105 + $5 = $110
- Lower breakeven: $95 - $5 = $90
- Maximum loss: $5 per share if XYZ finishes between $95 and $105 at expiration
- Upside profit potential: Theoretically unlimited if the stock rises sharply
- Downside profit potential: Limited by the stock reaching zero
The trade is profitable at expiration if XYZ finishes above $110 or below $90. A closing price between those levels does not produce enough option value to recover the $5 premium.
Why Do Traders Use a Long Strangle?
A long strangle suits a trader who expects volatility or a major price move but does not want to choose a direction.
Possible events that may lead to a large move include:
- Earnings announcements
- Regulatory decisions
- Product launches
- Mergers or acquisitions
- Major economic announcements
A long strangle can gain value before expiration if implied volatility rises. Time decay works against the position, however, so the underlying asset usually needs to move quickly, or implied volatility needs to rise enough to offset the loss of time value.
How Does a Short Strangle Work?
A short strangle involves selling an out-of-the-money call and an out-of-the-money put with the same expiration date. The trader collects both premiums and expects the underlying asset to remain between the two strike prices.
Using the same XYZ example:
- Sell a $105 call
- Sell a $95 put
- Receive total premium of $5 per share
The short strangle has:
- Maximum profit: $5 per share if XYZ finishes between $95 and $105
- Upper breakeven: $105 + $5 = $110
- Lower breakeven: $95 - $5 = $90
- Upside risk: Potentially unlimited if XYZ rises sharply
- Downside risk: Large if XYZ falls sharply
A short strangle benefits from time passing and, in general, from falling implied volatility. A sharp price move or a volatility spike can increase the value of the options sold and create significant losses.
Strangle Versus Straddle
A strangle and a straddle both combine a call and a put with the same expiration date. The key difference is the strike price.
| Strategy | Call strike | Put strike | Typical cost | Required price movement |
|---|---|---|---|---|
| Long straddle | Same strike, usually at the money | Same strike | Higher | Smaller |
| Long strangle | Higher strike, usually out of the money | Lower strike, usually out of the money | Lower | Larger |
A long strangle usually costs less than a long straddle because both options are out of the money. The trade-off is that the underlying asset must make a larger move for the strangle to become profitable.
What Are the Main Risks of a Strangle?
Long Strangle Risks
The maximum loss on a long strangle is the total premium paid. The position can lose that amount if the underlying asset moves too little, moves too slowly, or experiences a drop in implied volatility. Both options may then lose value and expire worthless.
Short Strangle Risks
A short strangle has limited profit but much larger potential losses:
- A short call can create theoretically unlimited losses if the underlying asset rises sharply.
- A short put can create large losses if the underlying asset falls sharply.
- Rising implied volatility can increase the value of the options sold.
- Early assignment can occur before expiration.
- A short option position may require margin and close monitoring.
The Options Industry Council describes the short strangle as a strategy for a stock that stays relatively steady. Its potential profit is limited, while its losses can be very large.
Is a Strangle Bullish or Bearish?
A long strangle is neither inherently bullish nor bearish. It is mainly a volatility position because it can profit from a sufficiently large move in either direction.
A short strangle has a neutral market outlook. It generally works best when the underlying asset remains within a range and implied volatility falls.
Long Strangle or Short Strangle: Which Is More Suitable?
For many newer options traders, a long strangle is easier to understand and has clearly limited risk, because the maximum loss is the premium paid. A short strangle can produce premium income, but its risk is much larger and may involve margin requirements, early assignment and active position management.
Before trading options, investors should review the Options Clearing Corporation's Characteristics and Risks of Standardized Options disclosure document.
Bottom Line
The choice between a long and short strangle depends on the expected price range:
- A long strangle is built for a large move when the direction is uncertain.
- A short strangle is built for a stable price within a range.
- Buyers have limited risk but need a sufficiently large move.
- Sellers collect limited premium while accepting much larger potential losses.