Strangle Option Strategy: Meaning, Types, How Does it Work

Buying or selling a call and a put option on the same underlying asset is known as a strangle. Despite having differing strike prices, both options have the same expiration date. The approach can be applied in a variety of market situations, depending on whether the trader anticipates a significant price change or comparatively little volatility.

This article explains the strangle option strategy in detail, including its benefits and limitations.

Key Takeaways

• Involves buying or selling out-of-the-money (OTM) call and put options with identical expiration dates.
• Long strangles profit from sharp volatility spikes or large price moves. Short strangles profit when markets remain range-bound and calm.
• Because both legs are OTM, strangles are generally cheaper to put on than at-the-money straddles.
• Long strangle profitability requires the underlying asset to move past upper and lower break-even thresholds.
• Theta works against long strangle holders (as options lose time value) but benefits short strangle sellers.
• Long strangles risk 100% of the premium paid; short strangles carry substantial tail risk if markets break out aggressively.

How Does a Strangle Work?

Traders often pick call and put strikes roughly equidistant from the current asset price (e.g., equal delta options), keeping the initial position close to delta-neutral.

A strangle uses two options on the same underlying asset:

• A call option gives the buyer the right to buy, but not the obligation to buy the asset.
• A put option gives the holder the right, but not the obligation, to sell the asset.

Both options have the same expiry date and different strike prices.

In a standard strangle, the call has a strike price above the current market price, while the put has a strike price below the current market price.

The way the strategy works depends on whether the trader goes for a long or short strangle.

Types of Strangle Strategies

There are two basic types of strangle strategies: long strangle and short strangle.

1. Long Strangle

A long strangle involves purchasing an out-of-the-money call and put on the same underlying asset. Both options expire on the same date but have different strike prices.

This strategy is used by traders who expect a large move in the asset's price but are unsure of its direction.

2. Short Strangle

A short strangle involves selling an out-of-the-money call and put on the same underlying asset. Both options have the same expiry date but different strike prices.

Traders may use this strategy when they expect the asset to stay within a particular price range.

Maximum profit is the premium received. But you can also lose a lot of money if the market moves sharply in either direction.

When do Traders use a Strangle?

The choice of a strangle depends mainly on the trader's expectations about volatility and price movement.

A long strangle may be considered when:

• A significant price movement is expected.
• The direction of the movement is uncertain.
• Volatility is expected to increase in the market.
• An important event may cause a sharp change in the underlying asset's price.

A short strangle may be considered when:

• The underlying asset is expected to remain within a range.
• Large price movements are not expected.
• The trader expects relatively low volatility.
• The trader wants to collect option premiums.

The actual outcome depends on factors such as option premiums, strike prices, time to expiry, and changes in volatility.

Long Strangle Example

Suppose a stock is currently trading at ₹1,000.

A trader expects the stock to make a large move, but is unsure whether the price will rise or fall. They set up a long strangle by:

• Buying a ₹1,050 call with a ₹20 premium.
• Buying a ₹950 put for a premium of ₹15.

Total premium paid = ₹35 per share.

The trader's maximum loss is limited to the ₹35 premium paid, assuming the options are held until expiry and ignoring transaction costs.

At expiry:

• If the stock rises significantly above the call strike, the call may generate a profit after covering the total premium paid.
• If the stock falls significantly below the put's strike price, the put may generate a profit after covering the total premium paid.

Break-Even Points for the Long Strangle

If the stock stays between the relevant break-even levels, the trader may make a loss.

For a long strangle:

• Upper break-even = Call strike price + Total premium paid.
• Lower break-even = Put strike price − Total premium paid.

According to the example:

• Upper break-even = ₹1,050 + ₹35 = ₹1,085.
• Lower break-even = ₹950 − ₹35 = ₹915.

So, at expiry, the stock would generally need to move above ₹1,085 or below ₹915 for the position to become profitable, before transaction costs and other charges are accounted for.

Short Strangle Example

Suppose another stock is trading at ₹500.

A trader expects the stock to remain relatively stable and sells:

• A ₹550 call for a premium of ₹10.
• A ₹450 put for a premium of ₹12.

Total premium received = ₹22 per share.

If the stock stays between ₹450 and ₹550 until expiry, both options may expire worthless, so the trader can keep the ₹22 premium received before costs.

Break-Even Points for the Short Strangle

• Upper Break-Even Point: ₹572 (Calculated as Short Call Strike of ₹550 + Total Premium Received of ₹22)
• Lower Break-Even Point: ₹428 (Calculated as Short Put Strike of ₹450 - Total Premium Received of ₹22)

Profit and Loss Zone Analysis

Profitable Range: The trade remains profitable as long as the stock price expires anywhere between ₹428 and ₹572. Maximum profit (₹22 per share) is achieved if the stock stays entirely between the inner strikes of ₹450 and ₹550.

Loss Range: Losses start accumulating if the stock breaks out of the break-even boundaries.

• If the stock climbs above ₹572, the short call begins losing money.
• If the stock drops below ₹428, the short put begins losing money.

Traders often pick call and put strikes that are roughly the same distance from the current price, which keeps the position closer to delta-neutral at the start.

Strangle vs Straddle: Know the Difference

A strangle and a straddle are both options strategies that use a call and a put on the same underlying asset with the same expiry date. The main difference is their strike prices.

Feature	Strangle	Straddle
Strike prices	Different	Same
Options	Out of the money call and put	At the money call and put
Cost	Usually lower	Usually higher
Price movement required	Usually larger	Usually smaller

Benefits of a Strangle Strategy

A strangle can offer different benefits depending on whether it is bought or sold.

Long Strangle

• Limited risk: The maximum loss is generally limited to the premiums paid.
• Exposure to volatility: The strategy can benefit from a significant price movement in either direction.
• No need to predict direction: The trader does not need to know whether the underlying asset will rise or fall.
• Potential for large returns: A sufficiently large price movement can make one option significantly more valuable.

Short Strangle

• Premium income: The trader receives premiums when opening the position.
• Suitable for range-bound markets: It can benefit when the underlying asset remains within a certain range.
• Time decay: The passage of time can work in the option seller's favour when other factors remain favourable.

Risks of a Strangle Strategy

A strangle also has important risks that traders should understand.

Long Strangle

• Time decay (Theta): Options lose value as expiration approaches; if the underlying asset stays range-bound, both options decay and can expire worthless, resulting in a total loss of the premium paid.
• Volatility: The position benefits from rising implied volatility, but drops in volatility will decrease option prices even if the underlying asset price remains unchanged.

Short Strangle Risks

• Unlimited upside risk: A sharp rally in the underlying asset exposes the short call to theoretically unlimited losses.
• Substantial downside risk: A steep drop in the underlying asset leaves the short put vulnerable to severe losses as the asset price approaches zero.
• Adverse volatility shifts: Unlike the long strangle, a sudden increase in implied volatility expands option prices, making it much more expensive to buy back the short options to close the position.

Factors That Can Affect a Strangle

Several factors can influence whether a strangle becomes profitable or loses value:

• Underlying price: A sharp movement in the underlying price can increase an option's value.
• Strike prices: The distance between the strike prices affects the cost and potential outcome.
• Option premium: The premiums paid or received directly affect the break-even points.
• Time decay: Options generally lose time value as expiry approaches.
• Implied volatility: Changes in expected volatility can affect option premiums.
• Time to expiry: More time can give the underlying asset a greater opportunity to make the required move.

Conclusion

A strangle gives traders a way to take a position when they have expectations about how much an asset’s price may move, without necessarily predicting the exact direction. The long and short versions suit different market views and have different risk and reward profiles.