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chapter5/5 strangles

Chapter 5


Strangles consist of two legs. Both are either calls or both are puts, one is long and one is short, and both are typically out of the money. This position is similar to a straddle with the exception that the legs do not have the same strike.

The objective of the long strangle is to capture large price swings, like a straddle, but do it more cheaply. The cost of long strangle is less than a straddle, but the profit potential is also smaller.

The objective of the short strangle is to cash in on time premium, like a short straddle, but do it with less risk. The proceeds from a short strangle are less than a short straddle, but the potential for loss is also reduced.

Another form of a strangle involves trading two legs where the put strike is less than the call strike. Such a strangle is guaranteed to have value at expiration. The maximum profit is the sum of the time premium on both option legs. The position will lose money when the stock price is in the money on either option by more than the proceeds from the trade.


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