What Is a Long Strangle?
A long strangle involves buying an out-of-the-money (OTM) call and an OTM put on the same underlying with the same expiration. It costs less than a long straddle because both options are OTM (less expensive than ATM options), but it requires a larger price move to become profitable. The long strangle is a lower-cost way to bet on a big move in either direction when you are uncertain which way the stock will move.
Long strangles are commonly used before earnings announcements, FDA approvals, and other binary events where the outcome is uncertain but a large move is expected. The lower cost compared to straddles means a smaller maximum loss if the stock does not move. However, the tradeoff is that the stock must move further in either direction to reach the breakeven points because both options start out-of-the-money.
A long strangle on a $100 stock might cost $3.50 total (call at $110 for $2.00 + put at $90 for $1.50) versus $7.50 for the ATM straddle. The strangle costs 53% less, but the stock needs to move beyond $113.50 or $86.50 versus $107.50 or $92.50 for the straddle. You are trading a wider dead zone for lower cost.
Long Strangle Formulas
- 1Total cost = ($2.00 + $1.50) x 100 = $350
- 2Upper breakeven = $110 + $3.50 = $113.50
- 3Lower breakeven = $90 - $3.50 = $86.50
- 4Required move up = ($113.50 - $100) / $100 = 13.5%
- 5Required move down = ($100 - $86.50) / $100 = 13.5%
- 6Max loss = $350 (stock between $90 and $110 at expiration)
- 7At $120: Profit = ($120 - $113.50) x 100 = $650 (186% return)
- 8At $80: Profit = ($86.50 - $80) x 100 = $650 (186% return)
Long Strangle vs. Straddle Comparison
| Metric | Long Strangle | Long Straddle | Advantage |
|---|---|---|---|
| Total Cost | $350 | $750 | Strangle (-53%) |
| Max Loss | $350 | $750 | Strangle (-53%) |
| Upper Breakeven | $113.50 | $107.50 | Straddle (closer) |
| Lower Breakeven | $86.50 | $92.50 | Straddle (closer) |
| P&L at $120 | +$650 (186%) | +$1,250 (167%) | Strangle (% return) |
| Dead Zone Width | $90-$110 (20%) | Only at $100 | Straddle (narrower) |
Long Strangle Trading Guidelines
Executing a Long Strangle
- Long strangles cost 40-60% less than straddles on the same underlying
- Maximum loss is the total premium paid, making risk completely defined
- The dead zone between the strikes results in maximum loss if the stock stays range-bound
- Long strangles benefit from rising IV (positive Vega on both legs)
- Best used for event-driven trades where a large move is expected
The biggest disadvantage of a long strangle is the wide dead zone between the two strikes where you lose your entire investment. For a strangle with $90 and $110 strikes on a $100 stock, the stock can move up to 10% in either direction and you still lose everything. Only use long strangles when you expect a move larger than the combined dead zone.
If you expect a large move but are unsure of timing, consider a calendar strangle: buy a longer-dated strangle and sell a shorter-dated strangle at the same strikes. This reduces cost through the short premium while maintaining long-term exposure. The short strangle decays faster, providing partial funding for the position.