Strangle in Options

A strangle is an options trading strategy where a trader, just like in a straddle, buys both a call option and a put option on the same underlying asset, with the same expiration date but different strike prices, one above and one below the current market price.

What Are Strangles in Options Trading?

A strangle is a type of options strategy that helps traders benefit from large price movements in a stock, regardless of the direction. To create a strangle, you buy two options, one call option (which gives the right to buy the stock) and one put option (which gives the right to sell the stock). The key difference from a straddle is that these options have different strike prices, not the same.

For example, if a stock is trading at ₹1,000, a trader might buy a ₹1,050 call and a ₹950 put. Both options have the same expiration date, but the call is above the market price, and the put is below it. The goal is to profit if the stock moves sharply in either direction.

Why Use a Strangle?

You use a strangle when you expect big movements in a stock but don’t know which way it will go. Let’s say there’s a big event coming like earnings, a legal decision, or an economic announcement. The stock might swing a lot, but it’s unclear whether it will rise or fall. A strangle allows you to benefit from that volatility without picking a direction.

The idea is that one of the options, either the call or the put, will increase in value if the stock moves enough. As long as the move is large enough to cover the cost of both options (the premium), you can make a profit.

How to Use a Strangle Strategy

Here’s a step-by-step way to set up a strangle strategy and make the most of it:

Choose a stock that may move sharply

Look for stocks with upcoming announcements or events that could cause price swings.

Buy a call and a put with different strike prices but the same expiration

Typically, the call strike is above the current price, and the put strike is below it. This gives you a wider range of potential profit.

Watch the market

After entering the trade, keep an eye on price movements. If the stock jumps or drops sharply, one of your options could become profitable. You can choose to exit when your target profit is reached.

Terminologies associated with the Strangle Strategy

Understanding some common options trading terms can make the strangle strategy easier to understand and apply.

Put Option

A put option gives traders the right, but not the obligation, to sell a stock at a predetermined price before the option expires.

Call Option

A call option gives traders the right, but not the obligation, to buy an underlying asset at a predetermined price within a specific time period.

Spot Price

The spot price refers to the current market price of the underlying asset on which the options contract is based.

Strike Price

Strike Price is the predetermined price at which the option contract can be exercised.

In-the-Money Option

An option is considered in-the-money when exercising it would result in a profit. For a call option, this happens when the stock price rises above the strike price.

Premium

Options Premium is the amount paid by the buyer to purchase an options contract.

Out-of-the-Money Option

An option is called out-of-the-money when the stock price is less favourable than the strike price, making immediate exercise unprofitable.

At-the-Money Option

An option is considered at-the-money when the strike price and the current market price of the underlying asset are nearly the same.

How Does the Strangle Option Strategy Work?

A strangle strategy works by combining a call option and a put option with different strike prices but the same expiration date. Traders use this strategy when they expect a significant price movement but are unsure about the direction.

Typically, the call option is placed above the current market price, while the put option is placed below it. If the stock moves sharply upward, the call option increases in value. If the stock falls significantly, the put option becomes profitable.

The strategy becomes successful when the stock price moves far enough in either direction to cover the total premium paid for both options and generate a profit. If the stock remains within a narrow range, both options may lose value due to Time Decay.

Benefits of Strangles

Let’s look at a few key advantages of using a strangle strategy:

Profit in both directions

Just like with a straddle, a strangle lets you benefit whether the stock goes up or down. You don’t need to guess the direction, just that the stock will move a lot.

Lower cost than a straddle

Since the call and put are out-of-the-money (OTM), they cost less than at-the-money options. This means you can enter the trade for a smaller upfront investment.

Great for volatile events

Strangles are perfect for times when big events are expected, but it’s hard to predict the stock’s reaction. You’re betting on volatility itself, not direction.

Types of Strangles

There are mainly two types of strangle strategies used in options trading: the long strangle and the short strangle.

Long Strangle

A long strangle strategy is used when traders expect a strong price movement in either direction but are unsure about the market trend. In this strategy, traders buy a call option with a strike price above the current market price and a put option with a strike price below the current market price.

If the stock moves sharply upward, the call option gains value. If the stock falls significantly, the put option becomes profitable. However, if the stock price remains between both strike prices until expiration, traders may lose the total premium paid for both options.

Example of a Long Strangle

Suppose stock XYZ is trading at ₹50. A trader buys:

• A call option with a strike price of ₹55
• A put option with a strike price of ₹45

If the stock price rises significantly above ₹55, the call option may generate profits. Similarly, if the stock price falls below ₹45, the put option may become profitable. However, if the stock price stays between ₹45 and ₹55, both options may expire worthless.

Short Strangle

A short strangle strategy is generally used when traders expect low market volatility and believe the stock price will remain within a limited range. In this strategy, traders sell both a call option and a put option with different strike prices.

The trader earns the premium received from selling both options if the stock price stays between the strike prices. However, if the stock moves sharply in either direction, the strategy can result in significant losses.

Example of a Short Strangle

Suppose stock XYZ is trading at ₹50. A trader sells:

• A call option with a strike price of ₹55
• A put option with a strike price of ₹45

If the stock price remains between ₹45 and ₹55, the trader keeps the premium received from both options. However, if the stock price rises above ₹55 or falls below ₹45, losses may increase significantly.

Risks of Using Strangles

Even though strangles can be powerful, they come with risks. It’s important to know what you’re exposing yourself to:

Time decay (theta)

In time decay (theta) value of your options decreases over time, especially if the stock doesn’t move. If the stock stays within a tight range, both options lose value as expiration approaches.

Need for a big move

Because the options are out-of-the-money, the stock needs to move significantly in one direction for you to profit. Small moves won’t help much and might still result in a loss.

Limited upside vs. premium risk

Although your profit can be large, your loss is limited to the total premium paid for both options. That still means losing 100% if the trade doesn’t go your way.

Difference Between Straddle & Strangle

The two strategies may almost look similar, but they can be differentiated based on the following points

Pros and Cons of the Strangle Strategy

Like every options strategy, strangles come with both advantages and limitations. Understanding them can help traders decide when the strategy is suitable.

Pros of the Strangle Strategy

• Allows traders to profit from sharp price movements in either direction
• Requires a lower upfront cost compared to a straddle strategy
• Useful during earnings announcements and major market events
• Maximum loss is limited to the total premium paid in a long strangle

Cons of the Strangle Strategy

• Requires a large price movement to become profitable
• Both options can lose value quickly due to Theta
• Time decay increases as expiration approaches
• Incorrect timing or low volatility can lead to a complete premium loss

Strangle option strategy for volatility trading

The strangle strategy is widely used by traders who want to benefit from market volatility rather than predict price direction. It is commonly deployed before events that can trigger strong price movements, such as earnings announcements, economic data releases, or major policy decisions.

Traders often use strangles when they expect volatility to increase significantly. Since the strategy profits from large price swings, rising Implied Volatility can increase option premiums and improve trading opportunities.

However, timing is extremely important. If volatility decreases after entering the trade or the stock fails to move enough, both options may lose value quickly.

How Much Can You Make or Lose?

Profit

There’s no set limit to how much you can make. If the stock moves sharply in either direction, one of your options becomes very valuable. For example, if the stock rises significantly, the call option might surge in value. If the price of the same stocks drops, the put option will do the same. The bigger the move, the more you stand to gain.

Loss

The maximum loss is limited to the total premium paid for both options. If the stock doesn’t move much and both options expire worthless, you lose the entire investment. To break even, the stock must move beyond the combined cost of the two premiums.

Conclusion

A strangle is a solid strategy for traders who expect big stock moves but aren’t sure of the direction. It’s especially useful during times of high uncertainty or major news. The biggest advantage is that you can profit in either direction. The biggest risk is losing your premium if the move isn’t big enough. Like all strategies, use strangles with caution, good timing, and smart risk management.

Frequently Asked Questions (FAQs)

How to Define Strangle in Options?

A strangle is an options trading strategy where traders buy or sell a call option and a put option with different strike prices but the same expiration date.

How to trade a strangle in the stock market?

Traders create a strangle by buying or selling out-of-the-money call and put options on the same stock with the same expiration date. The strategy is generally used when high volatility is expected.

How to calculate profit from a strangle option trade?

Profit is calculated when the stock price moves significantly beyond either strike price and exceeds the total premium paid for both options.

Which Is Riskier: A Straddle or a Strangle?

A short straddle is generally considered riskier because it uses at-the-money options and is more sensitive to price movements. A long strangle carries a lower upfront cost but requires a larger move to become profitable.

When should I use a strangle strategy?

Use a strangle when you expect major price swings due to events like earnings announcements, news updates, or policy changes. It works best when you expect movement but don’t know which way the stock will go.

What if the stock price doesn’t move much?

If the price stays close to the current level and doesn’t move beyond the strike prices, both the call and the put could expire worthless. This means you’ll lose the full premium you paid for the options.

What’s the difference between a strangle and a straddle?

A straddle uses the same strike price for both options, while a strangle uses different strike prices. Straddles cost more but need less movement to become profitable. Straws are cheaper but need a bigger move to break even or make a profit.