Long Strangle

What is a Long Strangle?

A long strangle is similar to a straddle, but cheaper. You buy an out-of-the-money call and an out-of-the-money put with the same expiration but at different strike prices. Like a straddle, you profit from a big move in either direction. The difference is that both options are OTM, so the combined cost is lower, but you need a bigger move to profit.

This is for when you are very confident a big move is coming but you want to spend less upfront than a straddle would cost.

How to Set It Up

• Buy 1 OTM call above the current stock price
• Buy 1 OTM put below the current stock price
• Same expiration for both
• Strike selection: How far OTM you go depends on your budget and conviction. Typical setup is buying the call 5% above and the put 5% below the current price. The further out you go, the cheaper it is, but the bigger the move you need.
• Expiration: 30-60 days, or timed to a specific catalyst.

Your total cost is the combined premium. That is your max risk.

When to Use This Strategy

Use a long strangle when:

• You expect a massive move but do not know the direction
• The straddle is too expensive and you want a cheaper alternative
• A major binary event is coming — earnings, drug trial results, merger vote
• Implied volatility is low relative to expected actual volatility

The strangle needs a bigger move than the straddle because both options start out-of-the-money. They have no intrinsic value at entry — only time value. The stock has to move past one of your strikes and then enough further to cover the cost of both options.

Example Trade

Stock XYZ is trading at $100. Earnings are in two weeks and you expect a big move.

• Buy 1 XYZ $105 call for $1.50
• Buy 1 XYZ $95 put for $1.50
• Total cost: $1.50 + $1.50 = $3.00 ($300 total)
• Breakeven: $105 + $3.00 = $108 on the upside / $95 - $3.00 = $92 on the downside

If XYZ rockets to $115 after earnings, your call is worth $10 and the put is worthless. $1,000 - $300 = $700 profit (233% return).

If XYZ crashes to $85, your put is worth $10 and the call is worthless. Same math, $700 profit.

If XYZ stays at $100, both options expire worthless and you lose the $300.

Compare this to the straddle example: the strangle cost $300 versus $750 for the straddle. But you need XYZ to move to $108 or $92 to break even (8% move), compared to $107.50 or $92.50 for the straddle (7.5% move). Cheaper entry, wider breakevens.

Risk and Reward

• Max profit: Unlimited to the upside. Substantial to the downside.
• Max loss: Total premium paid. $300 in our example. Occurs when the stock stays between both strikes through expiration.
• Breakeven: Two points. Call strike plus total premium ($108) and put strike minus total premium ($92). There is a wider "dead zone" between your strikes where you lose money.

The advantage over the straddle is the lower cost. The disadvantage is the wider dead zone. It is a trade-off between cost and probability.

Tips and Common Mistakes

• Do not go too far OTM. Buying a $110 call and $90 put on a $100 stock is very cheap, but you need a 13%+ move to break even. That is unrealistic for most stocks. Stay within 3-7% OTM for reasonable breakevens.
• IV crush kills strangles too. Same problem as straddles. If you buy before earnings when IV is high, the options deflate after the announcement even if the stock moves your way.
• The dead zone is real. If XYZ moves from $100 to $103, that is a nice 3% move but both your options are still OTM. You lose on both legs. The strangle needs a decisive move, not a moderate one.
• Size small. Because the probability of profit is lower than many other strategies, keep position sizes small. This is a high-reward but low-probability trade.

Related Strategies

• Long Straddle — same concept but ATM strikes, more expensive but tighter breakevens
• Iron Condor — the opposite bet, selling a strangle with wings for protection
• Iron Butterfly — another way to sell volatility, pinned to a single strike