Strangles

What is the Strangle Option Strategy?

The strangle option strategy is a neutral strategy that involves simultaneously selling a put option and a call option with different strike prices but with the same expiration date. The call option gives the holder the right to buy the underlying asset at the strike price, while the put option gives the holder the right to sell the underlying asset at the strike price.

How to Use the Strangle Option Strategy

The strangle option strategy is typically used when a trader expects a significant price movement in the underlying asset, but is uncertain of the direction of the movement. By selling both the call and put options, the trader collects premium, which reduces the overall cost of the trade. If the price of the underlying asset remains within the strike prices of the call and put options, the trader can keep the premium as profit.

Max Profit/Loss

The maximum profit for the strangle option strategy occurs if the price of the underlying asset remains between the strike prices of the call and put options until expiration. In this case, the trader keeps the premium as profit. The maximum loss for the strangle option strategy occurs if the price of the underlying asset moves outside of the strike prices of the call and put options, causing one of the options to become in-the-money. In this case, the trader will incur a loss equal to the difference between the strike price and the market price of the underlying asset.

Pros and Cons

Like any trading strategy, the strangle option strategy has its pros and cons. One of the biggest advantages of the strangle option strategy is that it allows traders to collect premium, reducing the overall cost of the trade. Additionally, the strangle option strategy can be used in any market condition, making it a versatile strategy for traders to use.

However, the strangle option strategy also has its disadvantages. One of the biggest risks of the strangle option strategy is that it requires a significant price movement in the underlying asset to be profitable. If the price of the underlying asset remains within the strike prices of the call and put options, the trader will incur a loss. Additionally, the strangle option strategy can be a complex strategy for traders to understand, especially for those who are new to options trading.

In conclusion, the strangle option strategy is a neutral strategy that can be used by traders to generate income, hedge their positions, and profit from price movements in the underlying asset. While it has its advantages and disadvantages, the strangle option strategy can be a useful tool for traders who expect a significant price movement in the underlying asset, but are uncertain of the direction of the movement. However, it is important for traders to understand the risks and complexities of the strangle option strategy before incorporating it into their trading strategies.