Strangle is one of the option trading strategies that allow traders to hold both call and put options in different strike prices. Yet, they have the same expiration date and asset.
It is a good strategy once a trader is aware that the underlying asset’s price will get a large price movement, but, he or she is still unsure about the direction of that movement.
This strangle strategy is somehow similar to the other options trading strategy, straddle. They both only differ at the strike prices.
The Ways that A Strangle Works
There are two types of Strangle, the long strangle and the short strangle. These two have different processes.
Long Strangle
Long strangle is more common than the short strangle. In this strategy, traders purchase the call option of the underlying assets at a higher price than the current market price. On the other hand, the put option has a lower price than the underlying asset’s current market price.
This strategy owns a large profit potential due to the unlimited upside (theoretically) of the call once the underlying asset price rises. At the same time, the put option also can profit option if the asset’s price falls.
The only risk from this strategy is the premium limitation paid for the two options.
Short Strangle
This strategy is a neutral strategy, yet it has limited profit potential. The profit for this strategy comes from the stocks that traded in a narrow range around the breakeven points.
This strategy can get a maximum profit equivalent to the net premium for the two options. This strategy also brings less trading costs.
A Strangle vs. a Straddle
These two are similar options trading strategies. They give the opportunity for traders to gain benefit from a large move, either downside or upside.
However, a long straddle requires traders to buy at the money call and put options, while the strike price will be identical to the underlying asset’s market price. With the straddle, investors gain profit from the strike price.
