A strangle is a multi-leg options strategy that involves purchasing both a call and a put option with different strike prices but with the same expiration dates on the same underlying asset.
This strategy is used when investors believe there will be a large amount of volatility in the underlying asset. An is only profitable when there is a significant price movement in the near future. Strangle is similar to a Straddle options strategy which uses a call and put at the same strike price. In comparison, Strangle use call and put options at different strike prices.
A strangle is less expensive than purchasing a straddle because with a strangle, you are purchasing Out of the Money (OTM) contracts. However, the volatility must be more significant to turn a profit with a strangle.
How to Does a Strangle Work?
There are two types of Strangles Long and Short Strangles; however, we will be only covering Long Strangles here as this is the more common strategy.
With a long Strangle, the investor buys both Out-of-the-money (OTM) call and put options. The call options would have a strike price that is greater than the current asset price. While the put price would have a strike price that is less than the current asset price. View the payoff chart below to help understand.
Disclaimer: This is not financial advice. The features described in this article and the information provided does not constitute investment advice.
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