Strangles

From MarketsWiki
(Redirected from Strangle)
Jump to: navigation, search

A strangle is an options strategy in which the investor holds a position in both a call and a put with different strike prices but the same maturity and underlying asset. [1]

A long strangle is the simultaneous purchase of a long call and a long put on the same underlying security with both options having the same expiration but where the put strike price is lower than the call strike price.[2]

The strategy is profitable only if there are large movements in the price of the underlying asset. It is considered a good strategy if you think there will be a large price movement in the near future but are unsure of which way that price movement will be. It involves buying an out-of-the-money call and an out-of-the-money put option. A strangle is generally less expensive than a straddle because the contracts are purchased out of the money.[3]

Since the strangle involves two trades, a commission charge is likely for the purchase (and any subsequent sale) of each position; one commission for the call and one commission for the put and commission charges may significantly impact the breakeven and the potential profit/loss of the strategy.

The long strangle is similar to the long straddle. However, while the straddle uses the same strike price for the call and the put, the strangle uses different strikes. In the case of the strangle, the put strike is below the call strike. As a result, whereas the straddle expires worthless only if the stock price equals the strike price, the long strangle expires worthless if the underlying price is at or between the strike prices at expiration.

Graphs

References

  1. Strangle Definition. Investopedia.
  2. Options Strategies: The Long Strangle. Options Industry Council.
  3. "strangle". investopedia.