Strangle
In short
Buy OTM call and OTM put — cheaper than straddle, needs bigger move to profit
Like a straddle but both options are out-of-the-money. Cheaper to enter but the stock needs to make an even bigger move to profit. More speculative than a straddle but costs less upfront.
A long strangle buys an OTM call and OTM put. It's cheaper than a straddle (OTM options cost less) but requires a larger price move to be profitable. Max profit is unlimited (to the upside). Max loss = total premiums paid.
Formula
Breakeven = Lower Strike - Premium or Upper Strike + PremiumRelated concepts
- Straddle — You buy both a call and a put at the same strike. You profit if the stock makes a big move — up OR down. Perfect for earnings when you know something big will happen but don't know which way.
- Iron Condor — An iron condor sells both a call spread and a put spread. You collect premium and profit if the stock stays within a range. Think of it as betting the stock won't make a big move. Ideal when you expect a calm, boring market.
- Implied Volatility — Implied volatility is the market's guess about how much a stock will move. High IV means expensive options (the market expects big moves). Low IV means cheap options. Buy options when IV is low, sell when IV is high.
- Call Option — A call option is like a coupon that lets you buy a stock at today's price even in the future. If the stock rises, you profit. If it falls, you only lose what you paid for the coupon (the premium).