A long strangle is a bet that a stock is about to make a big move, when you don’t know which way. It’s the cheaper cousin of the straddle: instead of buying the call and put at the current price, you buy them a bit out of the money on each side. That lowers the cost, but the stock has to move further for you to make money.
How a strangle is built
You buy two options on the same stock with the same expiration:
- an out-of-the-money call with a strike above the current price, and
- an out-of-the-money put with a strike below it.
If the stock breaks out above the call strike, the call pays. If it breaks down below the put strike, the put pays. If it stays between the two strikes, both expire worthless and you lose what you paid.
Max profit, max loss and break-even
| Long strangle | |
|---|---|
| Max profit | Unlimited on the upside; on the downside, put strike − total premium |
| Max loss | Total premium paid for both options |
| Upper break-even | Call strike + total premium |
| Lower break-even | Put strike − total premium |
Worked example
Nvidia ($NVDA) is trading at $600 ahead of a big product launch. You buy a $620 call for $15 and a $580 put for $12, the same expiration. Total cost: $27 a share, or $2,700.
- Break-evens: $620 + $27 = $647 on the upside, $580 − $27 = $553 on the downside.
- NVDA jumps to $650: the call is worth $30 ($3,000), a $300 profit.
- NVDA drops to $550: the put is worth $30 ($3,000), the same $300 profit.
- NVDA sits at $600: both options expire worthless and you lose the full $2,700.
Notice how far the stock has to go. A $50 move either way, more than 8%, only just clears the break-even. That’s the trade-off for paying less than a straddle.
When a strangle makes sense
- Earnings, when you expect a gap but don’t want to pay for at-the-money options.
- Binary events, like an FDA decision, a merger vote or a court ruling.
- When implied volatility is low, so the options are cheap relative to the move you expect.
What can go wrong
- The move isn’t big enough. The stock has to clear one of the strikes and the total premium. A decent move that stops short still loses money.
- Time decay. Out-of-the-money options lose value quickly as expiration approaches.
- Volatility crush. Before earnings, option prices already bake in a big move. After the report, implied volatility collapses, and if the actual move is smaller than what was priced in, both legs lose value at once.
Tips
- Compare the break-evens with the expected move. If the stock would need to beat what the options market already expects, the odds are against you.
- Don’t hold to expiration by default. If the stock moves early, taking the profit before time decay eats it is often the better play.
- Size it as if it goes to zero, because if the stock stays put, it will.