Understanding
Stock Options Trading
and Technical Analysis Basics

Long Strangle Options Explained

Strangle options are a strategy that takes advantages of a stock's volatility. A long strangle option is the position to be used when high volatility is expected for the underlying stock. It is created by buying an out-of-the-money (OTM) call option (i.e. a call option whose strike price is above the underlying stock's current price), and buying an OTM put option (i.e. a put option whose strike price is below the underlying stock's price). Both these options have the same expiration date.

Long Strangle - Buy 1 OTM Put, Buy 1 OTM Call
Long Strangle - Buy 1 OTM Put, Buy 1 OTM Call

While the stock price is below the call option's strike price, the call will not be worth anything. Once the price goes above that strike price, the call option will give a profit. Similarly, while the stock price is above the put option's strike price, the put option is worthless. When the stock goes below that strike price, the put option starts to have value. Combining the profit profiles of these 2 options, we get the long strangle which has the potential for unlimited profit the higher the stock price climbs or the lower it falls. However, if the stock price stays in between the 2 strike prices, both the call and put options will be worthless, hence producing a loss.

This long strangle position needs to be closed before expiration. This can be done by selling just the component or option leg that has value (potentially saving transaction fees by letting the other leg expire). So if the stock has climbed, you would sell the call option and let the put option expire. The opposite would be true if the stock price fell. If the stock price did not move, you have no choice but to let both options expire worthless (or hopefully sell them if they have any time value left in them before expiration).

As can be seen from its profit profile, the long strangle option is ideal for volatile stocks whose price is expected to either climb or crash in the near future. This can be a useful strategy to be employed for stocks just before their earnings reports are released. A good report might cause the stock to skyrocket, while a bad report could cause it to crash. Similarly, other news such as research results or lawsuit resolutions that affect the stock could be triggers for high volatility.

Summary:

A Long Strangle option is a strategy for stocks with high volatility but whose direction is uncertain. It is created by buying an OTM call option and an OTM put option with the same expiration date. If the stock climbs or falls, potential profits are unlimited. If the stock price doesn't move, you lose the premium spent on this position.

A Short Strangle is the exact opposite to the long strangle, both in strategy and execution. This position is meant for stocks whose prices are known to basically stay still and not fluctuate. It is therefore a neutral strategy that sees profit when there is little market movement.

What is the difference between a strangle and a straddle? While both the long strangle and the straddle are created by buying a call and a put, the difference lies in the strike prices of those options. The 2 options in the straddle have the same strike price, while a strangle's options have 2 separate OTM strike prices. This difference affects the initial premium of the options (a long strangle's premiums will be lower), and chance to profit (a straddle needs less stock movement to profit).

Summary:

What is the difference between a straddle and a strangle? The long strangle uses a call and put with different strike prices, and is cheaper. The straddle uses a call and put with the same strike price, and will profit with less stock movement.