Strangle is a delta neutral trading strategy which pays off only with a large movement in the underlying market price. It consists of taking positions in call and put options simultaneously. The strike price of the call is higher than that of the put.

Types: Strangle is of two types – long and short

In a long strangle, the trader buys the call and put options of the underlying security. The trader is anticipating a large movement in the market but is not sure of the direction. So, he can buy strangle to capitalize on such a movement. He will make money if the market shows a strong direction on one side but will lose money if the market remains rangebound till the options expiry.

Long Strangle

In a short strangle, the trader sells the call and put options of the underlying security. He is expecting the market to be rangebound and wants to sell the options at a high premium. He will lose money is the market moves strongly in any direction, but will make money if the market remains rangebound till the options expiry.

Short Strangle

Characteristics of Strangle

Since strangle consists of two options, the parameters which affect the price of options also affect the price of the strangle.

  • An increase in volatility will increase the price of the strangle, which will be beneficial for the long side of the trade.
  • As the options reach expiry, the time decay or theta of the options will reduce their premium. This will be beneficial for the short side of the trade.
  • If the underlying market price moves strongly in either up or down direction, one of the options’ price will increase more than the reduction in the price of the other option. Say, if the market goes up, the call option will increase while put will decrease. If the market goes down, it will happen the other way around.

Uses of Strangle

Strangle is generally used when the traders are expecting an increase in volatility and a large directional movement. It can be used to build positions in Forex and Index options before macroeconomic events such as Federal Reserve Bank’s policy decision, declaration of GDP numbers, the release of national budget etc.

In the case of individual securities, strangles is a good way to capitalize on events such as the declaration of quarterly and annual results. Traders can also build positions in case a key regulatory decision or a decision on a materially large contract is about to be made.

One thing to note here is that the option premiums will start increasing some days before the actual event because the traders will start building their long strangle positions. A shrewd trader may take a short position on the day of the event if he expects no major decisions. He will be able to capitalize on the drop in premiums as the premiums are usually the highest right before the event.



Options, Futures and Other Derivatives by John C Hull

Last updated on : August 31st, 2017
What’s your view on this? Share it in comments below.

Leave a Reply

Callable Bonds
  • Bear Spread
    Bear Spread
  • Asset Backed Securities
  • Hedging
  • Warrants
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Join 122 other subscribers

    Recent Posts

    Find us on Facebook

    Related pages

    bill receivable meaningcurrent assets debtorsasset utilization definitionleveraged lease meaningdividend policies of companiesmake or buy decision example accountingdebenture bond definitionaverage inventory days formulaprofit leverage effect formulacapitalized lease definitionliquidity acid test ratiodifferentiate between profit maximization and wealth maximizationproblems with waccdividend discount model assumptionscapm in financial managementtypes of m&a transactionsturnover ratios formulalimitations of marginal costingbep formula in unitsdifference between overdraft and cash creditdifference between earnings per share and dividendslessor lessee agreementexpenses capitalisedimportance of capital budgeting techniquespvifa equationlease financing in indiadiluted earning per share formuladebit and credit examples of transactionscost of retained earnings calculatorjournal entry for capital leaseinvoice finance facilityreceivable turnover calculatordebentures and its typesmeaning of eoqreceivables debtorsmeaning of sanctioningrecourse factoring definitionadvantage of budgetary controlprofitability ratios meaningdefine relevant costfinancial statement with ratio analysisdividend irrelevance theorycost of capital waccdefine dividend payout ratiocapital lease cash flow statementhow to calculate ebit examplecapital budgeting assignmentzero coupon bond vs coupon bondearnings multiplierinterpolated rate calculationhow to calculate the average inventorygoodwill definition ifrscurrent account with overdraftcash ratio analysis interpretationquick ratio financeportfolio management and investment decisionreceivable turnoverdefine hedging in financem&m propositionspayout ratio analysisaccounting for installment salesdisadvantages of letter of creditdupont analysis explainedstretching accounts payablewhat does eva mean in financedebiting and creditingsg&a costs definitionmerits of marginal costingfinancial accounting equationwhat is meant by bookkeepingaccounting profitability ratioscapital vs operating leasesdisadvantages of cash flow forecastirr formula examplecapital rationing in financial managementexamples of a fixed expenseadvantages and disadvantages of irr methoddifference between credited and debitedbenefit cost ratio bcr