Long Strangle
Components
Long one OTM Call
Long one OTM Put
Long one put option with a lower strike price and long one call option at a higher strike price.
Risk / Reward
Maximum Loss: Limited to the total premium paid for the call and put options.
Maximum Gain: Unlimited as the market moves in either direction.
Characteristics
When to use: When you are bullish on volatility but are unsure of market direction.
A long strangle is similar to a straddle except the strike prices are further apart, which lowers the cost of putting on the spread but also widens the gap needed for the market to rise/fall beyond in order to be profitable.
Like long straddles, buying strangles is best when implied volatility is low or you expect a large movement of market price in either direction.
Comments (4)
Peter
May 13th, 2010 at 4:03am
You might be thinking of a short straddle/strangle. For a long straddle/strangle you want the implied volatility to be low and expect it to rise as an increase in volatility helps this kind of a position.
Sunny
May 12th, 2010 at 12:24am
I'm quite new to options so I might seem a bit dense but what do you mean by implied volatility being low? Isn't this strategy meant to be used when you believe volatility will be high?
Peter
December 28th, 2009 at 3:46am
Sorry RK, but not sure what you mean by a "Big" strangle. And what do you mean by "profit in ex"?
RK
December 26th, 2009 at 1:07pm
Kindly give any example of Big Strangles that how to make profit in ex
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