Long Strangle

Overview

The Long Strangle is the "budget version" of a Long Straddle. Instead of buying options right at the current price, you buy options that are slightly "out-of-the-money."

This lowers your entry cost (the "ticket price" for the trade), but it comes with a catch: the stock has to move much further before you start making any money.

[!TIP] Think of a Strangle as a wide V-shape. There is a "Dead Zone" in the middle where you lose 100% of your money. You are betting the stock will jump completely over that zone.

The Setup

A Long Strangle consists of:

1. OTM Put: Buy 1 Put at Strike $K_1$ (below the current price).
2. OTM Call: Buy 1 Call at Strike $K_2$ (above the current price).

Mechanics: The "Dead Zone"

In a Straddle, you start losing money the moment time passes. In a Strangle, you have a cushion where you lose money, but if the stock just stays between $K_1$ and $K_2$, you are in the "Max Pain" zone.

Payoff and Break-even

Max Profit

Unlimited to the upside, and nearly 100% to the downside.

$$\text{Max Profit} = \text{Unlimited}$$

Max Loss

The total debit paid for both options.

$$\text{Max Loss} = \text{Call Premium} + \text{Put Premium}$$

Break-even Points

Strangles have very wide break-even points:

• Upper BE: $K_2 + \text{Total Premium}$
• Lower BE: $K_1 - \text{Total Premium}$

The "Catalyst" Greeks

Strangles are direction-neutral but are extremely sensitive to velocity and time.

1. Delta: Slowly Reacting

Unlike an ATM straddle, an OTM strangle starts with low Delta on both sides (e.g., +0.15 and -0.15). The trade doesn't "pick up speed" until the stock gets close to one of the strikes.

2. Gamma: The Late Bloomer

Positive Gamma in a strangle is lower than a straddle at the start. However, if the stock makes a big move, Gamma will skyrocket as the option goes from OTM to ITM.

3. Vega: Long The Fear

You want Implied Volatility to explode. Buying a strangle when IV is at historic lows is a classic volatility expansion play.

4. Theta: The Ticking Bomb

Even though your "ticket price" is lower, you are still fighting time. Every day the stock doesn't move, your "lottery ticket" loses value.

When to Use?

• Binary Events: Earnings, clinical trial results, or election nights where you expect a 10%+ move.
• Cheap OTM Options: When the market is pricing in "calm" but you expect "chaos."

Checklist for Entry

• Is the expected move larger than the distance to my break-even points?
• Is the Implied Volatility (IV) low relative to recent history?
• Do I have an exit plan if the stock stays in the "Dead Zone" halfway through the trade?

Straddle vs. Strangle ComparisonRead more

Feature	Straddle	Strangle
Cost	High	Low
Probability	Moderate	Low
Break-even	Narrow	Wide
Gamma	High	Low

Strangles offer better "leverage" (percentage return) if a massive move happens, but they are more likely to expire worthless than straddles.