Options Trading 101: The Strangle Strategy Explained

Picture this: You’re pretty sure a stock is about to make a big move—maybe it’s Tesla before a battery-tech announcement or Pfizer before FDA news. But you don’t want to pay the hefty price tag of a Straddle. Enter the Strangle strategy. It’s like betting on a storm, but instead of buying a full-blown hurricane kit, you grab a raincoat and an umbrella. Let’s break down how this works.


What Is a Strangle?

A Strangle is an options strategy where you buy out-of-the-money (OTM) call and put options on the same stock with the same expiration date but different strike prices. Here’s the deal:

  • You buy an OTM call (higher strike price) and an OTM put (lower strike price).
  • If the stock surges above the call’s strike price, you profit.
  • If the stock crashes below the put’s strike price, you also profit.
  • If the stock stays between the two strikes, you lose the premiums paid.

It’s cheaper than a Straddle because the options are OTM, but you need a bigger price swing to profit.


Why Use a Strangle?

The Strangle is perfect for traders who:

  1. Expect Volatility, But Want to Save Money: It’s cheaper than a Straddle but still bets on a big move.
  2. Are Unsure of the Direction: Like a Straddle, you profit whether the stock goes up or down.
  3. Want Defined Risk: Your maximum loss is the total premium paid.

It’s the “I think something big is coming, but I’m not made of money” play.


When to Use a Strangle

The Strangle shines in these scenarios:

  • Earnings Season: Stocks often gap up or down, but you don’t want to pay for ATM options.
  • Binary Events: FDA approvals, merger rumors, or geopolitical news.
  • When IV is Low: Cheap premiums mean lower upfront costs.

For example, let’s say Tesla ($TSLA) is trading at $250 ahead of its Cybertruck event. You buy a $260 call and a $240 put expiring in 2 weeks. If Tesla rockets to $300 or plummets to $200, you win. If it stays between $240 and $260, you lose.


The Risks of a Strangle

Let’s keep it real: Strangles aren’t a free lunch. Here’s the fine print:

  1. Larger Price Swing Needed: The stock has to move farther than a Straddle to profit.
  2. Time Decay: Options lose value daily—especially OTM ones.
  3. Break-Even Points: The stock needs to move beyond the strike price plus/minus the total premium paid.

A Real-Life Example

Imagine Nvidia ($NVDA) is trading at $600 before a major product launch. You buy a $620 call for $15 and a $580 put for $12 (total cost: $27 per share, or $2,700). Here’s how it plays out:

  • If NVDA jumps to $650: Your call is worth $30 ($3,000), netting a $300 profit ($3,000 - $2,700).
  • If NVDA crashes to $550: Your put is worth $30 ($3,000), same $300 profit.
  • If NVDA stays at $600: Both options expire worthless, and you lose $2,700.

The key takeaway? You need a bigger move than with a Straddle, but you risk less upfront.