The Long Strangle
Like a Straddle, but cheaper. You buy Out-of-the-Money options to bet on a massive move, accepting a lower win rate for a higher potential reward-to-risk ratio.
What is a Long Strangle?
A Long Strangle involves buying an Out-of-the-Money (OTM) put and an OTM call with the same expiration date.
Because both options are OTM, they are cheaper than the ATM options bought in a Straddle. However, the stock needs to move even more to become profitable.
Is This Strategy Right for You?
Capital Requirements
Low to Medium. Cheaper than a Straddle, but still requires buying two options.
Options Approval Level
Level 2. Simply involves buying options.
Best Suited For
- •Earnings plays where you expect a massive gap
- •Low-cost lottery tickets on volatile assets
- •Situations where "it won't stay here" is the thesis
Pros and Risks
Advantages
- ✓Lower cost: Cheaper to enter than a straddle.
- ✓High leverage: OTM options have lower delta but can explode in value percentage-wise.
- ✓Wider Profit Zone: (Actually a disadvantage, usually Strangles have a WIDER loss zone). Wait, let's correct this.Unlimited Upside: Similar to a straddle, gains are theoretically unlimited.
Risks to Consider
- ⚠Lower Probability: Stock must move significantly just to reach your strikes.
- ⚠Time Decay: Theta eats away at your premium every day the stock stays between strikes.
- ⚠Complete Loss likely: It's common for both OTM options to expire worthless if volatility contracts.
How It Works
Key Terms
Select Strikes
Pick a call strike above the current price and a put strike below. Equal distance (delta) is common.
Buy Both Options
Enter the order to buy the strangle. You profit if the stock moves outside your selected range.
Close on Momentum
As volatility expands or the price moves, one side will gain value rapidly. Close for profit before reversal.
Worked Example: XYZ at $100
Using a $95/$105 Strangle.
Long Strangle Payoff
Position Entry
Put Strike
$95 ($2.00)
Call Strike
$105 ($2.00)
Total Cost
$4.00
Breakevens
$91 / $109
Stock Crashes to $80
Put Value
$15.00
Call Value
$0.00
Net Profit
+$11.00/share
Stock Rises to $103
Put Value
$0.00
Call Value
$0.00
Net Loss
-$4.00 (Max Loss)
Stock moved up $3, but not enough to reach the $105 call strike. You lose everything.
Common Scenarios
Range Bound
The stock wobbles between your strikes. Theta burns both options to dust. This is the most common way to lose with a strangle.
Black Swan Event
Strangles are often used as cheap hedges against market crashes. If the market collapses, the OTM put can 10x or 20x in value.