Long Strangle (Buy Strangle) Option Trading Strategy Explained

Published on Thursday, April 19, 2018 | Modified on Wednesday, June 5, 2019

Long Strangle (Buy Strangle) Options Strategy

Strategy Level	Beginners
Instruments Traded	Call + Put
Number of Positions	2
Market View	Neutral
Risk Profile	Limited
Reward Profile	Unlimited
Breakeven Point	two break-even points

The Long Strangle (or Buy Strangle or Option Strangle) is a neutral strategy wherein Slightly OTM Put Options and Slightly OTM Call are bought simultaneously with same underlying asset and expiry date.

This strategy can be used when the trader expects that the underlying stock will experience significant volatility in the near term.

It is a limited risk and unlimited reward strategy. The maximum loss is the net premium paid while maximum profit is achieved when the underlying moves either significantly upwards or downwards at expiration.

The usual Long Strangle Strategy looks like as below for NIFTY current index value at 10400 (NIFTY Spot Price):

Suppose Nifty is currently at 10400 and due to some upcoming events you expect the price to move sharply but are unsure about the direction. In such a scenario, you can execute long strangle strategy by buying Nifty Put at 10200 and buying Nifty Call at 10600. The net premium paid will be your maximum loss while the profit will depend on how high or low the index moves.

When to use Long Strangle (Buy Strangle) strategy?

A Long Strangle is meant for special scenarios where you foresee a lot of volatility in the market due to election results, budget, policy change, annual result announcements etc.

Example

Example 1 – Stock Options:

Let's take a simple example of a stock trading at Rs 40 (spot price) in June. The option contracts for this stock are available at the premium of:

• July 35 Put - Rs 1
• July 45 Call - Rs 1

Lot size: 100 shares in 1 lot

1. Buy 'July 35 Put': 100*1 = 100
2. Buy 'July 45 Call': 100*1 = 100

Net Debit: Rs 100 + Rs 100 = Rs 200

Now let's discuss the possible scenarios:

Scenario 1: Stock price remains unchanged at Rs 40

In this situation,

• July 35 Put - Expires worthless
• July 45 Call - Expires worthless
• Net Debit was Rs 200 initially paid to take the position.
• Total Loss = Rs 200

The total loss of Rs 200 is also the maximum loss in this strategy.

Scenario 2: Stock price goes above Rs 50

In this situation,

• July 35 Put - Expires worthless
• July 45 Call Expires in-the-money with an intrinsic value of (50-45)*100 = Rs 500
• Net Debit was Rs 200 initially paid to take the position.
• Total Profit = Rs 500 - Rs 200 = Rs 300

Scenario 3: Stock price goes down to Rs 30

In this situation,

• July 35 Put Expires in-the-money with an intrinsic value of (35-30)*100 = Rs 500
• July 45 Call - Expires worthless
• Net Debit was Rs 200 initially paid to take the position.
• Total Profit = Rs 500 - Rs 200 = Rs 300

Example 2 - Bank Nifty

Market View - Neutral

When you are unsure of the direction of the underlying but expecting high volatility in it.

Actions

• Buy OTM Call Option
• Buy OTM Put Option

Suppose Nifty is currently at 10400 and you expect the price to move sharply but are unsure about the direction. In such a scenario, you can execute long strangle strategy by buying Nifty at 10600 and at 10800. The net premium paid will be your maximum loss while the profit will depend on how high or low the index moves.

Breakeven Point

two break-even points

A Options Strangle strategy has two break-even points.

Lower Breakeven Point = Strike Price of Put - Net Premium

Upper Breakeven Point = Strike Price of Call + Net Premium

How to exit?

• If the price of the underlying moves up, sell the Call and profit from Put.
• If the price of the underlying moves down, sell the Put and profit from Call.

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