In finance, a strangle is a

options strategy Option strategies are the simultaneous, and often mixed, buying or selling of one or more 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 particular stock at that ...

involving the purchase or sale of two

options Option or Options may refer to: Computing *Option key, a key on Apple computer keyboards *Option type, a polymorphic data type in programming languages * Command-line option, an optional parameter to a command *OPTIONS, an HTTP request method ...

, allowing the holder to profit based on how much the price of the underlying security moves, with a neutral exposure to the ''direction'' of price movement. A strangle consists of one call 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 strangle, while if the options are sold, it is known as a short strangle. A strangle is similar to a

straddle In finance, a straddle strategy involves two transactions in options on the same underlying, with opposite positions. One holds long risk, the other short. As a result, it involves the purchase or sale of particular option derivatives that all ...

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 lower cost and lower probability of profit than straddles. Long strangle option

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 makes a profit 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 is a 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 are known to exhibit asymmetrical risk profiles, with larger possible maximum losses being observed compared than the maximum gains to the upside. Active management may be required if a short strangle has become 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, in order 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 of returns.

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