A strangle is an options strategy that involves holding both positions in a call and a put option with different strike prices, but with the same expiration date and underlying asset. For ex: you sell an out of the money put and an out of the money call, this strategy is called a short strangle.

When we deploy this strategy we are short Vega and long Theta, as volatility decreases and time passes your option will gain value. (However, being short volatility means there is unlimited loss in either direction if the price of the underlying moves too much).

Therefore, when we are short a strangle, we want IV to decrease until the option expires. If we know volatility is mean reverting, you might want to deploy this strategy when IV is at a relative high.

You can also be long a strangle. You simply buy an OTM call and buy an OTM put. In this strategy you are long Vega and short Theta. So you want IV to increase and increase quickly.

Because we want IV to increase with a long strangle, a good time to deploy this strategy might be when IV is at its lows:

As you can see, a strangle is similar to a straddle but uses options at different strike prices, while a straddle uses a call and put at the same strike price. We will be covering more options strategies in the next post so in the meantime keep DYOR and stay tuned!

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