Strangle
An options strategy buying a call and a put at different, typically further out-of-the-money strike prices, profiting from a large move but at a lower upfront cost than a straddle.
A strangle is an options strategy similar to a straddle (see Kaavon's "Straddle" glossary definition), combining a call option and a put option on the same underlying asset and expiration date, but using different strike prices that are typically both further out-of-the-money than the current market price, rather than the identical at-the-money strike a straddle uses. Because out-of-the-money options are generally cheaper than at-the-money ones, a strangle costs less upfront than a comparable straddle.
The lower cost comes with a tradeoff: since both strikes are further from the current price, a strangle requires a larger price move in either direction before it becomes profitable, compared to a straddle on the same underlying asset and expiration. Like a straddle, a strangle is a bet on the magnitude of a coming price move rather than its direction, and it's most profitable when volatility turns out to be even larger than what the combined premium cost implied.
Examples
- A trader expecting significant volatility but wanting to pay less upfront than a straddle would cost might use a strangle instead, accepting that it needs a larger price move to profit.
- Both a straddle and a strangle profit from large price moves in either direction, but a strangle's wider strikes mean it requires a bigger move to reach profitability.