Strangle – an investment much like a Straddle that involves buying both a call option and a put option of the same underlying security. Like a straddle, the options expire at the same time, but unlike a straddle, the options have different strike prices. The owner of a long strangle makes a profit if the underlying price moves far enough away from the current price, either above or below. The Strangle is best used regarding volatile assets when the investor is not sure in which direction the volatile asset is moving. This position has unlimited potential for profit and limited exposure as the purchaser can only lose the purchase price of the options.
Example #1 Strangle In-The -Money:
Stock XYZ is currently trading at $60 a share. The trader enters into two option positions, one call and one put. Say the call is for $65 and costs $200 ($2.00 per option x 100 shares) and the put is for $55 and costs $185 ($1.85 per option x 100 shares). The trader will make money if the price of the stock starts to move outside of the range of $55 and $65. Say that the price of the stock ends up at $35. The call option will expire worthless and the loss will be $200 to the trader. The put option however has gained considerable value, it is worth $815 ($1,000 less the initial option value of $185). So the total gain the trader has made is $615.
Example #2 Strangle Out-Of-The-Money:
Stock XYZ is currently trading at $100 a share. The trader enters into two option positions, one call and one put. The call is for $110 and costs $300 ($3.00 per option x 100 shares) and the put is for $90 and costs $250 ($2.50 per option x 100 shares). If the price of the stock stays between $90 and $110 over the life of the option, both options will expire worthless and the lost to the trader will be $550 (the total cost of both options).
