Strangle (options strategy)

What is a strangle?

A strangle is an options strategy that profits from a large price move in either direction. You buy (or sell) a call and a put on the same underlying with the same expiration but different strike prices—typically both out of the money for a long strangle. The goal is to capture a big upward or downward move without predicting the direction.

Key takeaways

• Long strangle = buy an out-of-the-money call + an out-of-the-money put (same expiration). Profits if the underlying moves far enough up or down to overcome the combined premiums. Maximum loss = total premiums paid. Upside profit is theoretically unlimited.
• Short strangle = sell an out-of-the-money call + an out-of-the-money put. You collect premiums and profit if the underlying stays in a narrow range. Maximum profit = premiums received; potential losses can be large or unlimited.
• Strangles are generally cheaper than straddles because strikes are out of the money, but they require a larger price move to become profitable.
• Time decay and implied volatility are critical — long strangles lose value from time decay; short strangles suffer if volatility or price movement increases.

When to consider a strangle

Use a long strangle when you expect elevated volatility (a big move) but are uncertain about direction. Common catalysts:
* Earnings announcements
* FDA decisions or binary biotech events
* Merger and acquisition news
* Major central bank (e.g., Fed) announcements
* Large product launches or other event-driven stories

How to construct a strangle

Long strangle (most common)

1. Buy an out-of-the-money call (strike above current price).
2. Buy an out-of-the-money put (strike below current price).
3. Use the same expiration for both options.

Risk/reward:
* Maximum loss = premium paid for both options.
* Breakeven points:
* Upside breakeven = call strike + total premium paid.
* Downside breakeven = put strike – total premium paid.
* Profit occurs if the underlying moves beyond either breakeven before expiration.

Short strangle

1. Sell an out-of-the-money call and an out-of-the-money put (same expiration).
2. Collect premiums up front.

Risk/reward:
* Maximum profit = premiums received.
* Potential losses can be very large if the underlying makes a large move (unlimited on the upside if uncovered).

Strangle vs. straddle

• Straddle = buy (or sell) an at-the-money call and put with the same strike and expiration.
• Strangle uses out-of-the-money strikes, so it costs less but needs a larger move to profit.
• Straddles profit with smaller moves but are more expensive; strangles are cheaper with a wider required move.

Advantages and disadvantages

Pros
* Can profit from large moves in either direction.
* Lower upfront cost than a comparable straddle (when long).
* Flexible: you can space strikes to match risk tolerance and cost.

Cons
* Requires a significant move to overcome combined premiums.
* Long strangles suffer from time decay and require the move to happen before expiration.
* Short strangles have limited profit and potentially very large losses.

Real-world example

Assume SBUX trading at $50. You buy:
* Call strike 52, premium $3.00 → $300 cost (1 contract = 100 shares).
* Put strike 48, premium $2.85 → $285 cost.
Total premium paid = $585 ($5.85 per share).

Breakeven points:
* Upside = 52 + 5.85 = $57.85
* Downside = 48 − 5.85 = $42.15

Outcomes:
* If SBUX stays between $42.15 and $57.85 at expiration → both options expire worthless and you lose $585.
* If SBUX falls to $38 → put value = (48 − 38) × 100 = $1,000. Net = $1,000 − $285 = $715 on the put; minus $300 lost on the call = $415 net profit.
* If SBUX rises to $57 → call intrinsic = (57 − 52) × 100 = $500; call net = $500 − $300 = $200; minus $285 lost on the put = $85 net loss (move not large enough to offset premiums).

Breakeven and risk formulas

• Total premium (per share) = premium_call + premium_put.
• Upside breakeven = call_strike + total_premium.
• Downside breakeven = put_strike − total_premium.
• Long strangle max loss = total premium paid.
• Short strangle max profit = total premium received; max loss = large/unlimited.

How to manage a strangle

• Choose expiration with enough time for the anticipated event-driven move.
• Monitor implied volatility — buying when IV is low can improve odds; selling when IV is high increases premium received but raises risk.
• Consider closing or rolling one side if the underlying moves strongly in one direction to lock profits or limit losses.
• Use position sizing and risk limits; short strangles may require hedges or margin management.

Quick FAQs

Q: What’s the main difference between long strangle and short strangle?
A: Long = buy both options (benefit from big moves, limited loss). Short = sell both (collect premiums, risk of large losses).

Q: When is a strangle better than a straddle?
A: When you expect a large move but want a cheaper position; strangles cost less because strikes are further out of the money.

Q: How does time decay affect strangles?
A: Time decay (theta) erodes the value of both options in a long strangle; the position must move enough, soon enough, to offset this decay.

Bottom line

A strangle is a flexible volatility play that lets you profit from large moves in either direction while controlling upfront cost (long) or collecting premium for range-bound markets (short). Success requires choosing the right strikes, expiration, and event window — and careful management of time decay, implied volatility, and position risk.