Strangle

A strangle is an options strategy built by buying, or selling, a call and a put on the same underlying stock with the same expiration date but different strike prices, typically an out of the money call above the current stock price and an out of the money put below it. Like a straddle, a strangle is a bet on how much a stock moves rather than on the direction it moves in, but the two different strikes change the cost and payoff profile.

A long strangle, buying both the out of the money call and the out of the money put, profits if the stock makes a large enough move past either strike price before expiration. Because both options start out of the money, a strangle costs less upfront than a comparable straddle using at the money options, but it also requires a bigger move in the stock before the position becomes profitable, since the stock has to travel further to reach either strike. The maximum loss is limited to the combined premium paid, realized if the stock stays between the two strike prices through expiration.

A short strangle, selling both options, profits as long as the stock stays between the two strike prices through expiration, letting the seller keep the combined premium as both options expire worthless. It has a wider profitable range than a short straddle since the stock has more room to move without breaching either strike, but the risk beyond that range is still large and, on the call side, theoretically unlimited. Traders often choose a strangle over a straddle when they want a cheaper way to position for a big move, or a wider cushion when selling premium against a stock they expect to stay relatively calm.