Tim Olson
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description, tags
| description | tags | ||||
|---|---|---|---|---|---|
| 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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Long Strangle
Section: 2.23 | Asset Class: Options | Type: Volatility
Overview
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.
Construction
- Buy 1 OTM call option at strike K1
- Buy 1 OTM put option at strike K2 (K2 < K1), same expiry
Net debit: D
Payoff Profile
f_T = (S_T - K1)+ + (K2 - S_T)+ - D
- Upper breakeven: S*_up = K1 + D
- Lower breakeven: S*_down = K2 - D
- Max profit: P_max = unlimited (stock can move far in either direction)
- Max loss: L_max = D (if K2 <= S_T <= K1 at expiry; both options expire worthless)
Key Conditions / Signals
- Neutral directional view; expects a very large move but uncertain of direction
- Cheaper than a straddle but requires a larger price movement to profit
- Ideal before high-impact events where an extreme move is anticipated
Notes
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.