Option Trading Lesson 2.3

What Is a Strangle?

A strangle is an options strategy in which the investor holds a position in both a call and a put option with different strike prices, but with the same expiration date and underlying asset.

A strangle is a good strategy if you think the underlying security will experience a large price movement in the near future but are unsure of the direction. However, it is profitable mainly if the asset does swing sharply in price. (Set 龍門)

How Does a Strangle Work?

Strangles come in two forms:

Long strangle (LC 105, LP 95)

Investor simultaneously buys an out-of-the-money call and an out-of-the-money put option. The call option's strike price is higher than the underlying asset's current market price, while the put has a strike price that is lower than the asset's market price. 

This strategy has large profit potential since the call option has theoretically unlimited upside if the underlying asset rises in price, while the put option can profit if the underlying asset falls. The risk on the trade is limited to the premium paid for the two options. (買刀仔，鋸大樹)

Short strangle (SC 105, SP 95)

Investor simultaneously sells an out-of-the-money put and an out-of-the-money call. This approach is a neutral strategy with limited profit potential. 

A short strangle profits when the price of the underlying stock trades in a narrow range between the breakeven points. The maximum profit is equivalent to the net premium received for writing the two options, less trading costs. (兩手準備，一手現金一手貨，賣合約收錢)