- Non-Directional Strategy
- Bet on volatility
A long strangle is used when people anticipate a large stock price movement but the direction of the movement is uncertain. A strangle is a non-directional strategy. This is a strategy where someone simultaneously buys a slightly OTM call and another slightly OTM put option. The strike price of the call option is higher than the current market price of the underlier, whereas the strike price of the put option is less than the current market price of the underlier.
Example: Suppose the price of BTC is $17,500, and you expect sharp price movements in the next month. You would then:
- Buy one OTM call option with a strike price of $19,000, paying a $489.49 premium
- Buy one OTM put option with a strike price of $16,000, paying a $721.05 premium
With the total premium costing $1,208, the long strangle on BTC with strike prices of $16,000 and $19,000 would break even at $14,792 or $20,208 on the expiry date. Therefore it is profitable once the price passes either breakeven point.
Long Strangle vs. Long Straddle
Strangles and Straddles are somewhat similar. Strangles are cheaper than straddles in general. A Long Straddle is a strategy where someone simultaneously buys an ATM call and an ATM put option. Whereas with a Long Strangle, someone simultaneously buys an OTM call and an OTM put option.
One can see that with a long strangle, the maximum loss of a strangle is less than the maximum loss of a straddle. The cost of the premiums for a strangle is also less than the total cost for a straddle. However, with a long Strangle, the breakeven points are further out than with a long straddle.