Long Strangle
Buying an OTM put and an OTM call at different strikes to profit from a large move at lower cost than a straddle.
Profit / Loss Diagram
Long Strangle at expiration
What is this strategy?
The Long Strangle is a volatility-buying strategy similar to the Long Straddle but cheaper. Instead of buying a put and a call at the same at-the-money strike, you buy both out of the money at different strikes: a put at a lower strike to profit from declines, and a call at a higher strike to profit from rallies. This reduces the initial debit because out-of-the-money options are cheaper than at-the-money ones, but it requires a larger price move to be profitable.
The strangle’s main advantage is the lower cost of entry: typically 30–50% cheaper than a straddle with the same expiration. That reduces absolute dollar risk. The challenge is that price must move further — at least to the strikes of the options purchased — simply to reach breakeven. The breakeven points are further away than in a straddle.
The Long Strangle suits situations where you expect volatility but have a limited budget, or where you expect a very large move. It works well ahead of announcements at lower cost. It is also useful when implied volatility is already relatively high — making a straddle expensive — while still letting you take a position on the expected move for a smaller investment. Like the straddle, it suffers from post-event IV crush.
Construction
| Action | Instrument | Strike | Expiration | Example |
|---|---|---|---|---|
| BUY | 1 Put (OTM) | Lower OTM | 30-60 DTE | +1 GLD 195 Put |
| BUY | 1 Call (OTM) | Higher OTM | Same expiry | +1 GLD 210 Call |
Example
Scenario: GLD at $202.50, you expect a large move over the next 4 weeks, but IV is high. You choose a strangle over a straddle.
- Put Purchased (OTM) +1 GLD 195 Put @ $1.50
- Call Purchased (OTM) +1 GLD 210 Call @ $1.50
- Total Debit $300 (1.50 + 1.50 × 100)
- Maximum Gain Unlimited (upside) or $19,200 (downside if GLD → $0)
- Maximum Loss $300 (if GLD stays between 195 and 210 at expiry)
- Breakeven (Upside) $213.00 (210 + 3.00)
- Breakeven (Downside) $192.00 (195 − 3.00)
- Scenario: GLD at $215 Call worth $500, put expires worthless, net profit $200
- Versus a straddle $300 strangle vs $400–500 straddle (25–40% cheaper)
The Greeks
The OTM call’s delta runs 0.30–0.40 and the OTM put’s −0.30 to −0.40. They largely cancel, but not perfectly, leaving a slight bias.
Both OTM options carry less theta than ATM ones, so decay is slower. It still works against you if price does not move.
Both OTM options carry positive vega. Rises in IV benefit the position, though less than an ATM straddle.
Positive gamma on both legs. As price moves, delta becomes more favourable, accelerating gains.
Position Management
- 01 Sell Quickly After a Move If price moves toward one of the strikes before expiration, consider selling that side and banking the gain. Do not wait for both sides to pay.
- 02 Close Before IV Crush If you opened ahead of an event, close immediately afterwards. IV crush is devastating. Do not hold to expiration.
- 03 Adjust if It Moves One Way Only If price moves significantly in one direction, close the leg that has gone deep out of the money and let the winning side run.
- 04 Be Patient With Theta Unlike the straddle, the strangle decays more slowly. You have more time. Still monitor if price has not moved after several weeks.
- 05 Take Profits at 50% If you reach 50% of maximum potential gain, close. Better than chasing maximum gain and risking IV crush or a reversal.