Strangle

Strangle

A strangle is a market-neutral options strategy used when a trader expects high volatility but isn't sure which way the price will swing. It’s the "budget-friendly" cousin of the straddle, designed to profit from explosive price movement.

How it Works

To execute a long strangle, you simultaneously buy two different options with the same expiration date but different strike prices:

  • Out-of-the-Money (OTM) Call: Profit if the price skyrockets.
  • Out-of-the-Money (OTM) Put: Profit if the price plunges.

Because both options are OTM (the stock price sits between the two strikes), the "entry fee" or premium is lower than other volatility strategies.

Example Scenario

Stock Price: $100
The Trade: Buy a $105 Call and a $95 Put.
The Goal: You need the stock to move significantly past $105 or $95 to offset the cost of both premiums.
The Risk: If the stock stays between $95 and $105 through expiration, both options lose value and may expire worthless. Your maximum loss is the total premium paid.

The Breakdown & Break-evens

In options trading, you aren't profitable the moment the stock hits your strike price; you have to move past the strike far enough to "earn back" the premiums paid.

  • Stock Price: $100
  • $105 Call Cost: $2.00
  • $95 Put Cost: $2.00
  • Total Cost (Net Debit): $4.00

Calculation Formulas

Upper Break-even: Strike Price (Call) + Total Premium = 105 + 4 = $109
Lower Break-even: Strike Price (Put) - Total Premium = 95 - 4 = $91

What This Means for the Trader

  • The "Death Zone": If the stock finishes anywhere between $91 and $109, you are technically at a loss.
  • Maximum Loss: If the stock finishes exactly between $95 and $105, you lose the full $4.00 ($400 per contract).
  • Profit Zone: You only start making "real" money if the stock moves more than 9% in either direction.

Strangle vs. Straddle

While both bet on volatility, the strangle is cheaper to enter because you are buying OTM strikes. However, the trade-off is that the stock must move a greater distance to become profitable.

Feature Long Strangle Long Straddle
Strike Prices Two different OTM strikes Same ATM strike
Cost (Premium) Lower Higher
Break-even Larger price move needed Smaller price move needed
Risk Limited to premium paid Limited to premium paid

Which one should you choose?

  • Choose a Strangle if: You expect a massive, violent move and want to risk less capital upfront.
  • Choose a Straddle if: You expect a move but aren't sure if it will be large enough to reach the wider strike prices of a strangle.
Visit GLOBAL ABAS for more insights.

Disclaimer: This post is for informational purposes only and does not constitute financial, legal, or investment advice. Please consult a qualified professional for guidance tailored to your situation.

For personalized support, contact GLOBAL ABAS Consulting, LLC with your specific questions or concerns.

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