Long Strangle

1. Definition

A Long Strangle is a volatility strategy where an investor simultaneously buys an Out-of-the-Money (OTM) Call and an Out-of-the-Money (OTM) Put with the same expiration date but different strike prices. It is a cheaper alternative to the Long Straddle.

2. Market View

• Very High Volatility: Used when a massive price movement is expected. Since OTM options are used, the stock needs to move significantly more than in a Straddle to become profitable.

3. Setup

Assuming stock price is $100: * Action: Buy Put (Strike $90) + Buy Call (Strike $110). * Cost: Lower Net Debit compared to a Straddle because OTM options are cheaper.

4. Profit & Loss

4.1. Max Profit

Unlimited Potential profit is uncapped if the stock price rises sharply or falls drastically.

4.2. Max Loss

Limited Occurs if the stock price finishes anywhere between the two strike prices ($90-$110). The maximum loss is limited to the premium paid upfront.

5. vs. Straddle

While cheaper to enter, the break-even points are wider. The stock must make a bigger move to cover the cost and start generating profit.