In
finance
Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...
, a strangle is an
options strategy
Option strategies are the simultaneous, and often mixed, buying or selling of one or more Option (finance), options that differ in one or more of the options' variables. Call options, simply known as Calls, give the buyer a right to buy a particul ...
involving the purchase or sale of two
options, allowing the holder to profit based on how much the price of the
underlying
In finance, a derivative is a contract between a buyer and a seller. The derivative can take various forms, depending on the transaction, but every derivative has the following four elements:
# an item (the "underlier") that can or must be bou ...
security moves, with a neutral exposure to the ''direction'' of price movement. A strangle consists of one
call
Call or Calls may refer to:
Arts, entertainment, and media Games
* Call (poker), a bet matching an opponent's
* Call, in the game of contract bridge, a bid, pass, double, or redouble in the bidding stage
Music and dance
* Call (band), from L ...
and one
put with the same expiry and underlying but different
strike price
In finance, the strike price (or exercise price) of an option is a fixed price at which the owner of the option can buy (in the case of a call), or sell (in the case of a put), the underlying security or commodity. The strike price may be set ...
s. Typically the call has a higher strike price than the put. If the put has a higher strike price instead, the position is sometimes called a guts.
If the options are purchased, the position is known as a
long
Long may refer to:
Measurement
* Long, characteristic of something of great duration
* Long, characteristic of something of great length
* Longitude (abbreviation: long.), a geographic coordinate
* Longa (music), note value in early music mens ...
strangle, while if the options are sold, it is known as a
short strangle. A strangle is similar to a
straddle position; the difference is that in a straddle, the two options have the same strike price. Given the same underlying security, strangle positions can be constructed with a lower cost but lower probability of profit than straddles.
Characteristics

A strangle, requires the investor to simultaneously buy or sell both a call and a put option on the same underlying security. The strike price for the call and put contracts are usually, respectively, above and below the current price of the underlying.
Long strangles
The owner of a long strangle profits if the underlying price moves far away from the current price, either above or below. Thus, an investor may take a long strangle position if they think the underlying security is highly
volatile, but does not know which direction it is going to move. This position has limited risk, since the most a purchaser may lose is the cost of both options. At the same time, there is unlimited profit potential.
Short strangles
Short strangles have unlimited losses and limited potential gains; however, they have a high probability of being profitable. The assumption of the short seller is neutral, in that the seller would hope that the trade would expire worthless in-between the two contracts, thereby receiving their maximum profit.
Short strangles exhibit asymmetrical risk profiles, with larger possible maximum losses observed than the maximum gains to the upside.
Active management may be required if a short strangle becomes unprofitable. If a strangle trade has gone wrong and has become biased in one direction, a seller might add additional puts or calls against the position, to restore their original neutral exposure.
Another strategy to manage strangles could be to roll or close the position before expiration; as an example, strangles managed at 21 days-to-expiration are known to exhibit less negative
tail risk, and a lower
standard deviation
In statistics, the standard deviation is a measure of the amount of variation of the values of a variable about its Expected value, mean. A low standard Deviation (statistics), deviation indicates that the values tend to be close to the mean ( ...
of returns.
See also
*
Condor (options)
A condor is a limited-risk, non-directional options trading strategy consisting of four options at four different strike prices. The buyer of a condor earns a profit if the underlying is between or near the inner two strikes at expiry, but has a ...
*
Ladder (option combination)
In finance, a ladder, also known as a Christmas tree, is a combination of three options of the same type (all calls or all puts) at three different strike prices. A long ladder is used by traders who expect low volatility, while a short ladder ...
Notes
References
{{DEFAULTSORT:Strangle (Options)
Options (finance)
Derivatives (finance)