Long Strangle Strategy

The Long Strangle strategy is a method of options trading that gains from large price movements in either direction. It is a strategy of buying two out-of-the-money (OTM) options: a call and a put, both of the same underlying asset and the same expiration date.

How Does a Long Strangle Work?

The trader buys:

• An OTM Call Option (strike price higher than the current market price)
• An OTM Put Option (strike price less than current market price)

Such a strategy is cheaper than a Long Straddle, which takes up at-the-money (ATM) options since OTM options are cheap. The only problem with this strategy is that the stock or index has to undergo a big price fluctuation to gain profits.

Example of a Long Strangle

If the Nifty index is 8200, the trader purchases:

• A 8400 Call (OTM)
• A 8000 Put (OTM)

If the price moves abruptly past either strike owing to volatile prices, the trader stands to make very good profits.

Risk, Reward, and Breakeven Points

• Risk: Restricted to the entire premium paid for both options.
• Reward: Unlimited, depending on how far the price has moved.
• Breakeven Points:
  • Upper Breakeven: Call Strike Price + Net Premium Paid
  • Lower Breakeven: Put Strike Price – Net Premium Paid

When to Use

A Long Strangle is perfect when one is anticipating high volatility but cannot anticipate the direction.

Conclusion

The Long Strangle strategy presents an inexpensive mechanism for making a profit from price swings with restricted risk and boundless potential earnings. It is a useful mechanism for seasoned speculators in fluctuating markets.