Strangle: A Comprehensive Guide for Options Traders

Strangle is one of the most widely-used non-directional options strategies, especially favored by traders seeking to benefit from price volatility or time decay. Unlike a Straddle that uses At-the-Money (ATM) options, a Strangle is constructed using Out-of-the-Money (OTM) options, offering more flexibility and risk control. 

This two-legged strategy involves taking simultaneous positions in an OTM Call and an OTM Put with the same underlying and expiry. Thanks to the broad range of available strike prices, Strangle allows traders to tailor risk-reward profiles based on individual market views. 

Long Strangle 

A Long Strangle involves buying an OTM Call and an OTM Put, both with the same expiry. The expectation here is a sharp price movement in either direction. 

Strategy Construction 

Below is the payoff structure of a Long Strangle: 

• Bank Nifty is trading at 39,042 

• Buy 40000 CE at ₹123.8 

• Buy 38000 PE at ₹147.15 

• Expiry: August 25, 2022 

• Lot size: 25 

Cost and Risk 

• Total cost = ₹123.8 × 25 + ₹147.15 × 25 = ₹6,773.75 

• This is the maximum possible loss in the trade 

Being a net debit strategy, the trader pays upfront to enter this position. While the risk is limited to the premium paid, the profit potential is theoretically unlimited if there's a large move beyond the breakeven points. 

Breakeven Points 

• Upper breakeven = 40000 + (123.8 + 147.15) = ₹40,270.95 

• Lower breakeven = 38000 - (123.8 + 147.15) = ₹37,729.05 

Profit is realized only if Bank Nifty moves beyond either breakeven point by expiry. 

Trade Dynamics 

• Max Loss: ₹6,773.75 

• Max Profit: Unlimited 

• Breakeven Range: 37,729.05 to 40,270.95 

• Probability of Profit: 32.43% 

• Risk Type: Defined risk 

This strategy is often used ahead of high-impact events where a significant price move is anticipated. 

Greeks in Long Strangle 

While the Long Strangle is a non-directional strategy, some traders attempt to balance the deltas. In our example: 

• Delta of 40000 CE = +20.51 

• Delta of 38000 PE = -19.8 

• Net delta = +0.71 (near delta-neutral) 

• Theta (time decay) works against the strategy, especially as expiry nears 

• Vega (volatility): Low IV is ideal for entry since premiums are cheaper 

• Flexibility in choosing strikes allows traders to customize based on event significance and risk appetite 

Short Strangle 

A Short Strangle involves selling an OTM Call and an OTM Put, aiming to profit from time decay if the underlying remains rangebound. 

Strategy Construction 

Below is the payoff structure of a Short Strangle: 

• Sell 40000 CE at ₹123.8 

• Sell 38000 PE at ₹147.15 

• Premium Collected: ₹270.95 

• Lot size: 25 

• Total Premium = ₹6,773.75 

• Expiry: August 25, 2022 

• Margin Required: ₹1,35,778 

Breakeven Points 

• Upper breakeven = 40000 + 270.95 = ₹40,270.95 

• Lower breakeven = 38000 - 270.95 = ₹37,729.05 

Key Metrics 

• Max Profit: ₹6,773.75 (if Bank Nifty stays between strikes) 

• Max Loss: Unlimited (if price moves sharply in either direction) 

• Probability of Profit: 67.56% 

• Risk Type: Unlimited risk, defined reward 

Trade Dynamics 

• The Short Strangle profits when the underlying remains rangebound between the strikes 

• Losses escalate if the price breaches either side 

• Traders often use this during high IV periods, such as event weeks, to collect higher premiums 

Greeks in Short Strangle 

• Delta: Can be adjusted to neutral at initiation 

• Theta: Major contributor to profits as options lose value over time 

• Vega: Higher implied volatility at entry can offer better returns 

• Typically deployed on near-term expiries for faster theta decay 

Professional traders on m.Stock often prefer this strategy during event days, thanks to wider premium spreads and better risk-reward ratios. 

Conclusion 

Strangles are a powerful addition to any trader’s playbook. Compared to Straddles, Strangles offer: 

• More strike flexibility 

• Lower premium costs 

• Better risk-reward customization 

While Long Strangles offer unlimited profit and defined loss, they require a strong directional move. On the other hand, Short Strangles come with limited profit potential but higher probability of success  ideal for rangebound markets.