3. What Is a Strangle Strategy in Options?
Definition
A strangle is a non-directional options strategy where a trader buys:
- One put option at a lower strike price
- One call option at a higher strike price
- Both options must have the same underlying asset and the same expiration date
The goal is to profit from a large move in the underlying asset, regardless of the direction. Unlike a straddle, where both options have the same strike, a strangle is set wider apart — making it cheaper to enter, but it requires a larger move to become profitable.
Market Scenario: When to Use It
Use a strangle when:
- You expect high volatility, but don’t know which way the market will go
- There is an upcoming event (earnings, policy decisions, elections)
- The stock or index is trading in a tight range and a breakout is expected
- You want a cheaper alternative to a straddle, with limited risk
Example: Long Strangle Setup
Assume Stock XYZ is trading at ₹100. You execute the following:
- Buy ₹95 put option for ₹4
- Buy ₹105 call option for ₹3
Total premium paid = ₹4 + ₹3 = ₹7 This ₹7 is the maximum possible loss.
Breakeven Points
- Upper breakeven = ₹105 + ₹7 = ₹112
- Lower breakeven = ₹95 – ₹7 = ₹88
Profit occurs only if the stock moves beyond ₹112 or below ₹88.
Payoff Table
| Stock Price at Expiry | Put Option Value | Call Option Value | Net Profit/Loss |
|---|---|---|---|
| 85 | 10 | 0 | +3 |
| 88 | 7 | 0 | 0 |
| 95 | 0 | 0 | –7 |
| 100 | 0 | 0 | –7 |
| 105 | 0 | 0 | –7 |
| 112 | 0 | 7 | 0 |
| 120 | 0 | 15 | +8 |
Key Metrics
| Feature | Value |
|---|---|
| Max loss | ₹7 (total premium paid) |
| Max profit | Unlimited (if price breaks out) |
| Breakeven zone | ₹88 to ₹112 |
| Best outcome | Strong move beyond breakevens |
| Market outlook | Highly volatile |
Strangle vs Straddle
| Feature | Straddle | Strangle |
|---|---|---|
| Strike prices | Same for call and put (ATM) | Different (OTM call + OTM put) |
| Cost | Higher | Lower |
| Breakeven points | Closer to current price | Farther from current price |
| Profit requirement | Smaller move required | Larger move required |
| Use case | Volatility expected, less aggressive | Strong volatility expected |
Summary
- A strangle is a low-cost, non-directional strategy used to profit from large price movements in either direction
- It involves buying a put and a call with different strike prices, both out-of-the-money
- Maximum loss is limited to the premium paid if the stock stays within the strike range
- Profit occurs when the stock breaks out of the breakeven zone, either above or below