Strangle

Strangle

Buying or selling an out-of-the-money put option and call option on the same underlying instrument, with the same expiration. Profits are made only if there is a drastic change in the underlying instrument's price.

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Strangle. A strangle is a hedging strategy in which you buy or sell a put and a call option on the same underlying instrument with the same expiration date but at different strike prices that are equally out-of-the-money.

That is, the strike price for a put is above the current market price of the stock, stock index, or other product, and the strike price for a call is below the market price.

If you buy a strangle, you hope for a large price move in one direction or another that would allow you to sell one of the contracts at a significant profit. If you sell a strangle, you hope there's no significant price move in either direction so that the contracts expire out-of-the-money and you keep the premium you received.

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Strangle

What Does Strangle Mean?

An options strategy in which the investor holds positions in both a call and a put option with the same maturity and underlying asset but with different strike prices. This option strategy is profitable only when there are large movements in the price of the underlying asset. This strategy is used when an investor thinks that there will be large price movements in the near future but is unsure whether the price movements will be up or down.

Investopedia explains Strangle

This strategy involves buying an out-of-the-money call and an out-ofthe-money put option. A strangle is generally less expensive than a straddle because the contract premiums are due less to the fact that the options are out of the money. For example, a stock is trading at $50 a share. With the strangle option strategy, an investor enters into two option positions: one call and one put. Say the call option is for $55 and costs $300 ($3 per option × 100 shares) and the put option is for $45 and costs $285 ($2.85 per option × 100 shares). If the price of the stock stays between $45 and $55 over the life of the option, the investor's loss will be $585 (total cost of the two option contracts). The investor will make money when the price of the stock starts to move outside that range, for example, when the stock price goes to $35. In this case, the call option will expire worthless and the loss will be $300, but the put option will be worth $715 ($1,000 minus the initial option value of $285). Thus, the investor's total gain is $415.

Related Terms:
• Hedge
• In the Money
• Maturity
• Stock Option
• Straddle