A Strangle is a 2 leg option strategy that is of 2 types, A Long Strangle & Short strangle. A long Strangle is an option buying strategy that involves buying 1 OTM (Out of The Money) Call & Put option, of a particular Stock/Index at the same time and of the same expiry. It is implemented when expecting a big move on either side in the underlying asset. A short strangle is a option selling strategy that includes selling a OTM Call & Put option of the same expiry at the same time. This strategy is used when the overall outlook is neutral or flat.
Strangle Option Strategy-
A Strangle strategy is a 2 leg option strategy that includes Buying or Selling a Call & Put options simultaneously of a particular underlying asset for the same expiry. A strangle is used when the underlying asset is expected to give a big move in either direction or None, within the expiry. In a Long Strangle Strategy, the Trader expects a Large move in the underlying asset, wherein in the case of a Short Strangle the trader is expecting the underlying asset to expire in a pre-planned range in order to get the maximum profit out of this strategy.
The 2 types of Strangles-
- Long Strangle
- Short Strange
1.Long Strangle-
Long Strangle is an Option buying Strategy where an individual buys a slightly OTM (Out Of the Money) Call option as well as a slightly OTM Put option at the same time, of the same underlying asset and of the same expiry.
When implying this strategy, the trader is anticipating a big move, on either side. As this is a Net debit strategy, the maximum loss in this strategy is to total premium paid for buying the Call & Put options, and the trader will have to face the loss when the underlying asset expires anywhere in-between the range of the Call & Put bought. The maximum profit is uncapped. If there is an extremely wild move in the underlying asset then the trader could make very handsome profits from this strategy.
Example-
If the Spot price of ‘Nifty’ is 10000, and a Long strangle is implemented by buying a 10100 CE & a 9900PE then the breakeven range would be (10100-9900) +/- the total premium paid.
The maximum loss will be taken when Nifty expires within 9900&10100.
This strategy will start making profits when Nifty crosses 10150 on the upper side or 9850 on the lower side(considering 50 as the total premium paid for this strategy)
2.Short Strangle-
A Short Strangle strategy is an Option selling strategy where a Call & Put option is sold at the same time, of the same underlying asset, and of the same expiry. This strategy is implemented when the trader thinks that the underlying asset is not going to make any significant moves and will trade in between a certain range. Short Strangle is a Net Credit strategy therefore the maximum profit is limited to the total Credit or the total premium collected in this strategy, whereas the total loss is uncapped hence, if there is a wild move then there can be huge losses from this strategy.
Example-
If the Spot price of Nifty is 10,000 & it is expected to expire within 100 points from 10,000 then a Short Strangle strategy can be used by Selling a 10,100 CE (call option) & a 9900 PE (put option). If the total premium collected is 50 then the maximum profit that can be earned with this strategy is Rs50 if Nifty stays within 9900-10100, but the losses will only start if Nifty expires anywhere above 10150 & below 9850.
Conclusion-
To sum it up it can be said that a Strangle is a pretty simple and effective options strategy that is very easy to implement. Both the types of Strangles are implemented in exact opposite market conditions. A Long strangle is implemented when the overall market outlook is Trending whereas While implementing the Short strangle the overall market outlook is Neutral or Sideways. This makes it a versatile option strategy for every market condition.