What Is a Strangle?
A strangle is an options strategy that involves buying (long strangle) or selling (short strangle) both a call and a put option on the same underlying stock with the same expiration date but at different strike prices. Unlike a straddle where both options share the ATM strike, the strangle uses OTM strikes, making it cheaper to enter but requiring a larger move to profit.
The long strangle is a popular strategy before events like earnings announcements or FDA decisions where a large price move is expected but the direction is uncertain. The short strangle is an income strategy used by advanced traders to collect premium from both sides when they expect the stock to remain range-bound.
A strangle costs less than a straddle because both options are OTM, but it requires a larger move to profit. The strangle has a wider breakeven range for the short seller (higher probability of profit) and a wider no-profit zone for the buyer (lower probability of profit).
Strangle Formulas
- 1Total cost = $1.50 + $1.50 = $3.00 per share ($300 per strangle)
- 2Upper breakeven = $105 + $3.00 = $108.00 (8% move up)
- 3Lower breakeven = $95 - $3.00 = $92.00 (8% move down)
- 4Max loss = $3.00 × 100 = $300 (if stock stays between $95-$105)
- 5If stock goes to $115: profit = ($115 - $105 - $3.00) × 100 = $700
- 6If stock goes to $85: profit = ($95 - $85 - $3.00) × 100 = $700
Strangle Strike Selection
| Put/Call Strikes | Width | Total Cost | Move Needed | Prob. Profit |
|---|---|---|---|---|
| $97/$103 | $6 | $4.50 | 4.5% | ~40% |
| $95/$105 | $10 | $3.00 | 8.0% | ~28% |
| $92/$108 | $16 | $1.50 | 9.5% | ~18% |
| $90/$110 | $20 | $0.80 | 10.8% | ~12% |
Best Practices for Strangles
- Strangles are cheaper than straddles but require bigger moves
- Short strangles have undefined risk and require Level 4 options approval
- The strangle width determines cost, breakevens, and probability
- Wider strangles are cheaper but have lower probability of profit
- Popular short strangle Delta targets: 16 Delta on each side (~68% probability zone)
If the unlimited risk of a short strangle concerns you, add protective wings to create an iron condor. You give up some premium but cap your maximum loss at a defined amount.
Short strangles require significant margin because of undefined risk. Your broker will typically require margin equal to the greater of the two short option margins plus the premium of the other side. A $100 stock short strangle might require $2,000-$3,000 in margin per position.