Strangles

A strangle is a modified straddle. Straddles utilize options to benefit from a large, or alternatively small, amount of price volatility.

A long strangle is created by purchasing a put and call with the same expiration date with a spread between the put and call’s strike prices: the strike price of the call is higher than the strike price of the put. The underlying price must move above the strike price of the call plus the cost of the premium to earn profit on the high side.

How To Read/Interpret Option Diagram

It must move below the strike price of the put minus the cost of premium to earn a profit on the low side. It is possible for options to be exercised at one end, fall or rise beyond the other end, and be exercised the second time. This maximizes the potential profit from a long strangle, but the internal spread created by differing strike prices means market price has a farther distance to travel. This play requires very high price volatility.

A short strangle is created by writing equal amounts of puts and calls on an underlying asset with the same expiration date. The put and call are written with a spread between strike prices, the call’s strike price is higher than the put’s strike price. The market price must remain within the two strike prices for you to earn your profit. Like a short straddle, if the price rises above or below the strike price it will be exercised against you, creating a loss.

How To Read/Interpret Option Diagram