Tim Olson
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34 lines
1.6 KiB
Markdown
34 lines
1.6 KiB
Markdown
---
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description: "A volatility strategy buying an OTM call at K1 and an OTM put at K2 < K1, profiting from a large move in either direction at lower cost than a straddle."
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tags: [options, volatility, neutral, strangle]
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---
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# Long Strangle
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**Section**: 2.23 | **Asset Class**: Options | **Type**: Volatility
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## Overview
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The long strangle is a volatility strategy consisting of a long position in an OTM call option with strike K1 and a long position in an OTM put option with strike K2 (K2 < K1). This is a net debit trade. Because both options are OTM, this strategy is less costly to establish than a long straddle. The flipside is that the move required to reach a breakeven point is more significant. The trader's outlook is neutral. This is a capital gain strategy.
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## Construction
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- Buy 1 OTM call option at strike K1
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- Buy 1 OTM put option at strike K2 (K2 < K1), same expiry
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Net debit: D
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## Payoff Profile
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f_T = (S_T - K1)+ + (K2 - S_T)+ - D
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- Upper breakeven: S*_up = K1 + D
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- Lower breakeven: S*_down = K2 - D
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- Max profit: P_max = unlimited (stock can move far in either direction)
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- Max loss: L_max = D (if K2 <= S_T <= K1 at expiry; both options expire worthless)
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## Key Conditions / Signals
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- Neutral directional view; expects a very large move but uncertain of direction
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- Cheaper than a straddle but requires a larger price movement to profit
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- Ideal before high-impact events where an extreme move is anticipated
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## Notes
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The maximum loss zone is the range [K2, K1] where both options expire worthless. The position is long vega and short theta. Compared to a straddle, the strangle is cheaper to enter but needs a bigger move to profit.
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