Strangle

The strangle options strategy is employed when you are super sure that the stock price is going to move significantly. Direction doesn’t matter, as indicated by our chart. Apologies, btw, for using an image with a logo. Searching for “strangle” on Yahoo! mostly yields results ranging from creepy to….distracting.

A better definition will now be copied and pasted from a better website. (optionsprofitcalculator.com)

A strangle involves buying a call and put of different strike prices. It is a strategy suited to a volatile market. The maximum risk is between the two the strike price and profit increases either side, as the price gets further away.

While I’m a big fan of weekly options for covered calls and cash-secured puts, I prefer to go much further out in expiration when it comes to any kind of spread where the current stock price eventually becomes the losing stock price. Prices fluctuate a lot, but you know what they often don’t do? Fluctuate.

Now, strangles (and also straddles which are technically different but not really) aren’t as cut and dry as using a LEAP to write calls. There’s long strangle, short strangle, in-the-money, out-of-the-money….oh boy. We’ll explore other definitions after this example that I input into Optionsprofitcalculator.com.

BBIG $5.20

BUY 10/29 $8 Call
BUY 10/29 $4 Put

Maximum risk: $21.00 (at BBIG$4.00)

Maximum return: infinite (on upside) ( $379 max return @ $0 )

Max return on risk: N/A

Breakevens at expiry: $8.01, $3.79

You can’t see the chart, unless you alt+tab, but at expiration the range of prices that are worthless is huge. Now, that’s not to say you should be waiting until expiration to close a position, but our first goal is to not lose money. If we go further out in expiry, we of course have more time before that happens.

Okay, so what if one or both options are ITM? If we move the call to an ITM strike at $4.50, the range between both option strikes becomes a big wall of red. Interestingly, though, the risk goes down the closer to expiration we get. It costs $281 to enter the position, but will not lose more than $130.

If instead, we move the put to an ITM strike of, then we lose at anything under $8 at expiration.

That’s pretty much what the alternate combinations do, is make a lightly modified put or call, depending. So really, kinda pointless.

A strangle is an options strategy where the investor holds a position in both a call and a put option of the same underlying security, same expiration date, but at different strike prices. A long strangle aims to make a profit when stock prices are expected to go up or down significantly and a short strangle earns a return when the stock prices are expected to stay stable or slight price change.

Which brings us to the next question - What if we sell the contracts, instead of buy? This calls for a picture!

Surprise! It’s the opposite of buying the positions!

“What if the strikes are the same price?” Well, then instead of a trapezoid you get a teepee. It’s tough to say which is going to get you a better return, as options prices are affected by more than just stock price and time. There’s also Rho.

Just kidding, but the Greeks are actually wonderful data to utilize in your options trading. Rho is sort of meaningless as it’s linked to interest rates, and interest rates barely exist….for now. But that’s a topic for another day, possibly in 2022.

TLDR

STRANGLE
=
BUY OTM CALL
BUY OTM PUT
DIFFERENT STRIKES PLZ KTHX

oh and same expiration, too