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OPTIONS STRATEGIES·LONG VOL·2 LEGS

Long strangle

Buy an OTM call and an OTM put at different strikes. Costs less premium than a straddle, but needs a larger move to be profitable.

INPUTS
Underlying price
$
Centers the payoff chart and computes P&L at this price.
LEGS
Long OTM put
Type
Side
Strike
$
Qty
Premium
$
Long OTM call
Type
Side
Strike
$
Qty
Premium
$
RESULT
BE $92.60BE $107.40spot $100.00
$60.002 strikes$140.00
P&L at current spot (expiry)
−$240
Net debit−$240
Max profitUnlimited
Max loss−$240
Breakevens$92.60 · $107.40
RISK PROFILE
Max profit
Unlimited (in either direction)
Max loss
Total premium paid
Breakeven
Put strike − (debit ÷ 100), Call strike + (debit ÷ 100)
HOW IT WORKS

How a long strangle works

A long strangle buys an out-of-the-money call and an out-of-the-money put in the same expiry. Like a straddle it is a bet on movement rather than direction, but because both legs start out of the money it costs less — and needs a bigger move to pay.

The lower cost is the appeal and the wider breakevens are the price. A straddle buys intrinsic value the moment the stock moves at all; a strangle needs the stock to travel past a strike before either leg has any intrinsic value, and then past the combined premium on top of that.

Everything that hurts a long straddle hurts a strangle more. Time decay is proportionally harsher because the position is entirely extrinsic value at entry, with no intrinsic value to hold it up. Out-of-the-money options also lose value faster as expiry approaches if the move has not arrived.

WORKED EXAMPLE

A worked example

XYZ trades at $100 and you expect a large move but want a cheaper position than a straddle. You buy the $105 call for $1.50 and the $95 put for $1.50, both expiring in 30 days.

Total debit
($1.50 + $1.50) × 100 = $300 (max loss)
Breakevens
$108.00 and $92.00
At expiry, XYZ = $115
Call worth $10 × 100 = $1,000 − $300 = +$700
At expiry, XYZ = $85
Put worth $10 × 100 = $1,000 − $300 = +$700
At expiry, XYZ between $95 and $105
Both expire worthless, −$300

Half the cost of the equivalent straddle, but breakevens 8% away instead of 6%. The whole $95–$105 range is a total loss, which is a wide window for a stock to sit in for a month.

FIT

When a long strangle fits — and when it doesn't

Consider it when
  • You expect a very large move and want to pay less than a straddle costs.
  • Implied volatility is low and the underlying has a history of making moves bigger than the breakevens.
  • You have enough time for the move to arrive — strangles punish short-dated impatience.
Think twice when
  • You expect a moderate move. It will very likely land inside the dead zone between the strikes.
  • Implied volatility is already elevated, especially before earnings.
  • Expiry is close. Out-of-the-money options decay fastest exactly when you have least time to be right.
FAQ

Common questions

What are the breakevens on a long strangle?

Call strike + total premium, and put strike − total premium. A $105/$95 strangle costing $3.00 per share breaks even at $108.00 and $92.00.

Is a strangle cheaper than a straddle?

Yes, because both legs start out of the money. But it needs a larger move to profit, so cheaper does not mean better — it is a different bet about how big the move will be.

What is the maximum loss?

The total premium paid. It is incurred anywhere between the two strikes at expiry, which is a range rather than the single point a straddle has.

Which strikes should I choose?

Wider strikes cost less and need more movement; closer strikes cost more and behave more like a straddle. The useful check is whether the breakevens fall inside a move the underlying actually makes with reasonable frequency.

RELATED STRATEGIES
Long straddle
Long volatility · Profits from big moves in either direction.
Short strangle
Short volatility · Wider profit zone than a short straddle.
Iron condor
Neutral · Defined-risk credit, profits when stock stays in range.
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