What is a strangle in options?
One of the best ways to become a profitable trader is to have a few tools in your chest. Whether you’re new to trading, or have been trading for a few years, you know that market conditions can quickly. Understanding which strategies to use at certain times will likely improve your odds of making some money in this wild market. How does an options strangle fit into that scenario? Stay tuned! Experienced traders are known to use this strategy when they expect big moves in the market. We’ll discuss why that is as well as provide a high-level overview of when this strategy can be used!
Key Takeaways
- A long strangle is an options strategy that involves buying a long call and a long put with different strike prices but the same expiration date in hopes of the underlying asset moving significantly in one way or the other.
- A long strangle is used when a trader is unsure as to which way the underlying asset will move. This strategy may be considered to capture larger-than-expected moves in either direction.
- Strangles are only profitable if the underlying asset moves enough to offset the premiums paid for both the call and the put.
How does a options strangle work?
A strangle is created by buying a call option and a put option with different strike prices but with the same expiration date. The call option gives the holder the right to buy the underlying asset at the strike price, while the put option gives the holder the right to sell the underlying asset at the strike price. If the underlying asset price moves outside the strike prices of the call and put options, then one of the options will increase in value while the other option will decrease in value. The goal of an options strangle is to profit from a price move in either direction.
For example, if a trader believes that a stock will make a big move but isn’t sure which direction it will go, then the strangle may be an ideal strategy.
Is a strangle different than a straddle?
A straddle is an options strategy where the investor holds a position in both a call and put with the same strike price and expiration date. A strangle is similar, but the strike prices are different. For example, a trader might buy a call with a strike price of $100 and a put with a strike price of $105.
“In order to make a profit on a straddle or strangle, the underlying security price must move enough to offset the cost of the premiums paid for the options. “
There are two types of straddles: short and long. A short straddle is when the trader sells both a call and a put. A long straddle is when the trader buys both a call and a put. Straddles can be either at-the-money or out-of-the-money. At-the-money means the strike price of the options is equal to the current market price of the underlying security. Out-of-the-money means the options have strike prices that are above (for calls) or below (for puts) the current market price of the underlying security.
The key difference between straddles and strangles is that straddles have breakeven points that are very close together, while strangles have breakeven points that are further apart. This is due to the fact that with a straddle, both options will have the same strike price, while with a strangle, the options will have different strike prices.
Straddles and strangles are high-risk/high-reward trade strategies since they require quite a bit of movement for them to be profitable. However, if timed correctly, they can be very profitable.
Example of a options strangle
The key to a successful strangle is for the price of the underlying asset to move enough in either direction so that one of the options expires in-the-money. For example, if you buy a call option with a strike price of $50 and a put option with a strike price of $30, you are hoping that the price of the underlying asset will move above $50 or below $30 before expiration. If it does, then one of your options will expire in-the-money and you will profit from the trade.
Options Strangle Chart
Option Strangle Calculator
To see how an options contract may be profitable, use the profit window under the analyze tab on ThinkorSwim or check out the calculator below.
Strangle Options Profit Calculator (finance-calculators.com)
Conclusion
A trader may find this strategy valuable if the underlying asset is in a squeeze and is about to fire off, but the trader is unsure of the direction. This strategy may also be helpful around earnings announcements that have a larger-than-expected move. Understanding how to use a strangle or a straddle may help you take advantage of price movements in either direction, instead of just choosing to go either long or short.
FAQs
A long strangle is an options strategy that involves buying a long call and a long put with different strike prices but the same expiration date, in hopes of the underlying asset moving significantly in one way or the other.
A strangle relies on the underlying asset to move beyond the strike price of the call or put. If the price of the underlying asset doesn’t move and stays between the strike price of the call and put, the position will expire worthless.
A long strangle is used when a trader is unsure as to which way the underlying asset will move. This can be beneficial around key reports such as earning when a larger than expected move has a higher potential of happening.
A trader may buy a strangle if they believe that the options price will change significantly in one direction or another but are unsure which direction to choose.
