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Long Strangle Option Strategy

In Long Strangle Option Strategy traders will take options in both directions of potential price movement. It is a neutral strategy that has OTM Put option and OTM Call together with the same underlying asset and expiry date. They have limited risk and unlimited reward strategy.

How to Use

The strangle is simple options spread that requires placing two orders with your broker. We need to buy calls on security and buy the same amount of puts on the same security. The transactions are made at the same time and use option contracts that are out of the money. Keep the cost low by buying contracts that are close to expiration, but allow less time for the price of the underlying security to move. So buying contracts with more time until expiration will be more expensive, but give a greater chance of making a profit.

Profit & Loss Potential

The long strangle returns an unlimited profit if the price of the underlying security makes a sizable move in either direction. At the time of a big move, one of the legs will return a substantial profit while the other leg will cost only the amount spent on the options. If the underlying security has no movement in price or moves very little then it will return a loss. The maximum profit is unlimited as the position continues to pick up again and further stock travels in either direction.
Maximum loss=Net premium paid

Breakeven

A strangle has two breakeven points as lower and upper.
Lower breakeven=Strike price of Out –Net premium
Upper breakeven=Strike price of call+Net premium

Example

The trading time with $50 and stock increase or decrease in the future. The investor can purchase a $55 call and $45 put for the net cost premium of $4.If the stock increases to $65 upon expiration, then a $55 call would be worth $10, less than a $4 premium. This results in a profit of $6.If the stock drops to $35 upon expiration then it has $45 put similar be worth $10 results in the same $6 after deducting the premium paid. If the stock is between the two strike prices of 45 and 55 then traders will lose their $4 investment.

Summary

The long strangle is a simple strategy that represents the best way to try and profit from significant price movement in either direction. There are only two transactions involved in a commission that are low and the relevant calculations straightforward. This is easily used by beginner traders. The long strangle has a long call and a long put so time decay works against the buyer of this strategy.