Friday, 27 January 2017
Strategy name and alternative names
Strangle. Alternative shorter names are Long strangle, poor-man’s straddle.
It is a combination involving an equal number of out-of-the-money (
OTM) long puts and long calls with the same expiration date.
It is a debit combination, which means you must pay to put on the position.
The strategy profits when the price of the underlying security moves up or down beyond the breakeven points.
Options used in the combination
Buy to open one OTM call and simultaneously buy to open one OTM put.
Both options derive from the same underlying stock.
The strike price of the put is below the current stock price by about the same amount as the call strike price
is above the security price.
For example, if the stock price is
100, you would buy a 95-strike put and a 105-strike call.
The advantage of this combination is that it benefits from volatility, independently of the direction of stock price movement.
Both the put and the call have (potentially) unlimited upsides but limited loss exposure.
A strangle is like a straddle, except that the put and call in a straddle have the same at-the-money strike price. Because the strangle uses cheaper OTM options, the total premium is less than that for a straddle, all other things being equal.