Long Strangle Strategy: Meaning & How It Works

A long strangle is an options strategy used when you expect a stock to make a large price move before expiry but are unsure whether it will rise or fall.

The strategy usually combines two out-of-the-money options:

1. You buy a call option at a strike price above the current stock price.
2. You buy a put option at a strike price below the current stock price.

Both options have the same underlying stock, expiry date and contract quantity.

An option is called out of the money, or OTM, when it has no intrinsic value at the current stock price. For example, if a stock is trading at ₹100, a ₹110 call and a ₹90 put are both out of the money.

A long strangle is a bet on volatility rather than direction. The trader expects the stock to move sharply but does not know whether the movement will be upward or downward.

How Does a Long Strangle Work?

Suppose ABC Ltd. is trading at ₹100. Priya expects an upcoming announcement to cause a large movement in the stock, but she is uncertain about the direction.

She creates the following position:

Priya pays ₹4 per share for the ₹110 call and ₹3 per share for the ₹90 put.

Her total premium cost is:

• Total Premium = Call Premium + Put Premium
• Total Premium = ₹4 + ₹3 = ₹7 per share

Assume one options contract represents 5,000 shares. Priya’s total premium cost is:

• ₹7 x 5,000 = ₹35,000

This ₹35,000 is the maximum amount Priya can lose from the strategy, excluding brokerage, taxes and other charges.

If ABC Ltd. rises sharply above ₹110, the call can gain value. If the stock falls sharply below ₹90, the put can gain value.

However, if the stock remains between the two strike prices, both options may expire without value and Priya can lose the entire premium.

Why Do Traders Use a Long Strangle?

A trader may expect high volatility but may not want to predict whether the stock will rise or fall.

A long strangle allows the trader to benefit from a large move in either direction. Since both options are out of the money, their combined premium is generally lower than the premium required for a long straddle.

However, this lower cost comes with a trade-off. The stock must move further before the strategy becomes profitable.

A long strangle therefore suits a trader who expects a large movement and wants a lower-cost volatility strategy.

How Does the Strategy Perform at Different Stock Prices?

Priya’s result depends on where ABC Ltd. trades at expiry.

1. If the stock remains between ₹90 and ₹110

Suppose ABC Ltd. remains at ₹100.

The ₹110 call expires without value because the stock is below the call strike price. The ₹90 put also expires without value because the stock is above the put strike price.

Priya loses the total premium of ₹7 per share.

• Maximum Loss = ₹7 x 5,000
• Maximum Loss = ₹35,000

This is the maximum possible loss from the strategy.

2. If the stock rises, but not enough

Suppose ABC Ltd. rises to ₹115.

The ₹110 call is worth ₹5 per share. The ₹90 put expires without value.

However, Priya paid a total premium of ₹7 per share. The ₹5 gain from the call is not enough to recover this cost.

• Loss per share = ₹7 - ₹5
• Total Loss = ₹2 x 5,000
• Total Loss = ₹10,000

The stock must rise above the upper break-even price before the strategy becomes profitable.

3. If the stock rises sharply

Suppose ABC Ltd. rises to ₹130.

The ₹110 call is worth ₹20 per share, while the ₹90 put expires without value.

After deducting the ₹7 total premium, Priya earns ₹13 per share.

• Profit = (₹130 - ₹110 - ₹7) x 5,000
• Profit = ₹65,000

If the stock continues rising, the profit can continue increasing. The maximum upside profit is unlimited in theory.

4. If the stock falls, but not enough

Suppose ABC Ltd. falls to ₹85.

The ₹90 put is worth ₹5 per share. The ₹110 call expires without value.

The ₹5 gain from the put is not enough to recover the ₹7 premium paid.

• Loss per share = ₹7 - ₹5
• Total Loss = ₹2 x 5,000
• Total Loss = ₹10,000

The stock must fall below the lower break-even price before the strategy becomes profitable.

5. If the stock falls sharply

Suppose ABC Ltd. falls to ₹70.

The ₹90 put is worth ₹20 per share, while the ₹110 call expires without value.

After deducting the ₹7 premium, Priya earns ₹13 per share.

• Profit = (₹90 - ₹70 - ₹7) x 5,000
• Profit = ₹65,000

The outcomes can be summarised as follows:

The payoff has three clear zones:

• Between ₹90 and ₹110, Priya loses the full premium.
• Between ₹83 and ₹117, the strategy remains in a loss.
• Below ₹83 or above ₹117, the strategy begins making a profit.

How Are Maximum Loss and Break-Even Calculated?

The key calculations for Priya’s long strangle are:

The maximum loss is limited to the ₹35,000 premium paid. This happens when ABC Ltd. finishes between ₹90 and ₹110 and both options expire without value.

The upper break-even price is ₹117. Priya starts earning a profit on the upside only when the stock rises above this price.

The lower break-even price is ₹83. She starts earning a profit on the downside only when the stock falls below this price.

What Are the Benefits and Risks of a Long Strangle?

• Lower cost than a long straddle: Since both options are out of the money, the combined premium is generally lower.
• Benefits from either direction: Priya can earn a profit if the stock rises above ₹117 or falls below ₹83.
• A very large movement is required: The stock must cross a wider break-even range before expiry. A moderate rise or fall may still result in a loss.
• Time decay can reduce both premiums: If the stock remains stable, both options lose value as expiry approaches.
• Volatility can fall after the event: Even if the stock moves, the strangle may lose money if the movement is smaller than expected and option premiums fall sharply.

Long Strangle vs Long Straddle

Both strategies benefit from high volatility, but their cost and break-even points differ.

A long straddle may be more suitable when the trader expects a large movement and is willing to pay a higher premium.

A long strangle may be more suitable when the trader wants a lower-cost position but expects the stock to move much further.

When Can a Long Strangle Make Sense?

A long strangle may make sense when:

• You expect a very large price movement before expiry.
• You are unsure whether the stock will rise or fall.
• You want a lower premium than a long straddle.
• You believe the stock can cross one of the two break-even prices.
• Both option contracts are sufficiently liquid.

The strategy may not be suitable when you expect only a moderate movement, option premiums are already expensive or the expected event may occur after expiry.

Long Strangle Strategy: Final Takeaway

A long strangle is a volatility strategy used when you expect a stock to move sharply but are uncertain about the direction.

The strategy involves buying an out-of-the-money call and an out-of-the-money put with the same expiry.

In Priya’s example, she buys the ₹110 call and ₹90 put for a combined premium of ₹7 per share. Her maximum loss is limited to ₹35,000. The strategy becomes profitable above ₹117 or below ₹83.

A long strangle is generally cheaper than a long straddle because both options are out of the money. However, the stock must make a larger move before the strategy becomes profitable.

The sensible way to evaluate a long strangle is to compare its two break-even prices with the movement you realistically expect before expiry.