Long Strangle

A Strangle is a slightly modified version of the Straddle. In a straddle, we buy At-the-Money options to ride the profits immediately. But At-the-money options are a bit costlier to buy. To make it cheaper, this strategy involves the simultaneous buying of a slightly out-of-the-money (OTM) put and a slightly out-of-the-money (OTM) call of the same underlying stock / index and expiration date but with a different strike price.

Since the initial cost of a Strangle is cheaper than a Straddle, the returns could potentially be higher. However, for a Strangle to make money it would require greater movement on the upside or downside for the stock / index than it would for a Straddle. In other words, volatility should be high in case of strangle compared to a straddle to stay in profit.

As with a Straddle, the strategy has a limited downside (i.e. the Call and the Put premium paid) and unlimited upside potential.

Example:

Current Market Price of Infosys is 940. So I will buy one call option of 960 strike at 10 and one put option of 920 strike at 5. This is because; we buy out-of-the-Money options with different strike prices in strangle. So, if the results are announced and the stock moves in either direction, I will be able to reap the benefits.

If the results are good and the stock moves up, the call option will give me profit and I’ll let go the put option expire worthless. Premium paid for the put option is my loss in this case. If the situation is such that the results are bad and the stock falls, the put option will give me profits and I’ll let go the call option expire worthless. Premium paid for the call option is my loss in this case.