Strangle Option Strategy

A strangle position is an options position created with puts and calls.

Simply.. this position is a purchase of a call option and a purchase of a put option out-of-money around the current price on the underlying stock price.

Here’s the thing… a long strangle is profitable with either a large move in volatility or a large move in the stock price.

This sounds like a complex or exotic strategy, but it really isn’t.

If you’re looking for a large stock move, but are uncertain which way the move will be, you’ll find yourself using a strangle.

Let’s say Microsoft is trading at $25.  Their earnings announcement is coming up and you think the stock can easily move 20% in any direction.  Simply… you believe after the announcement Microsoft will trade either below $20 or above $30 per share.

You can use your conviction by buying a strangle on Microsoft.  You could buy a December $30 strike call option for $.05.  In addition, you buy a December $20 strike put option for $.08.  So, this strangle position costs you a mere $.13 a share or $13 for the position.

It’s a long shot, but if Microsoft makes the large move you were looking for, obviously one of your options will increase in price.

However… if Microsoft’s earnings announcement comes and goes without incident, you’ll most likely lose your investment.

The good news it was only $13… hopefully you could live with that, for the potential profit if you were right.

Category: Options Trading Strategies