What is Strangle Option Strategy?

• Long Strangle option strategy, like long Straddle is a Volatility Strategy that aims to make money by a swing, either ways, from a stock/index soaring up or plummeting down. Long Strangle option strategy demands underlying to move significantly up i.e., this is non-directional, but volatility-based strategy. In other words, if the underlying fails to show a significant move, option trader will lose value in this as, both the option will expire worthless.

When to Execute Long Strangle Option Strategy?

• Long Strangle is a non-directional strategy, but the option trading strategy must be bullish on volatility. It is advised that Long Strangle should be implemented when there is a major event in the near term and volatility is on the lower range and expected to increase or can be implemented on an underlying, exhibiting highly volatile moves. Expiry should not be nearby, as there will time decay that happens highest in near term expiry, especially as DTE (days to expiry) reduce.

What is the Trade?

• Under Long Strangle option strategy , we buy 1 lot of Out-of-Money (OTM) Call and Put simultaneously for the same expiration; distance should be equal, between the two strike prices from the ATM.

Break-Even-Point

• Long Strangle will have 2 break-even points. The breakeven points can be calculated as given below. Lower Breakeven = PE - Net Premium Paid. Upper Breakeven = CE + Net Premium Paid

What will be maximum profit?

• Maximum Profit in a long strangle option strategy is undefined, if market shows significant move above or below the strike bought.

What will be your maximum loss?

• It is a Net debit strategy as we have bought both Call option & Put option. Maximum Loss is defined as, limited to premium paid.

What are the advantages?

• Being Directionally Neutral, you can participate in either way volatility jumps. Ideal to trade Strangle for stocks where earnings are due to be announced. On Indices where any major macro-economic data is due.

What are the disadvantages?

• Time decay is harmful to Strangle. Time day accelerates exponentially in the last week of expiry. The cost to establish Strangle is significantly high. If stock fails to give desired move, one can lose the premium.

Example of Long Strangle:

• Nifty fair future price 2 Feb 2023 is 18141.
  Long Strangle can be devised by
  Buying one lot of 18100 PE at Rs 135.70
  and
  one lot of 18200 CE at Rs 121.35
  Expiry: 2 Feb 2023.
  Net Premium Paid = Rs 257.05
  Net Premium paid effectively = Rs 12853/-.
  Undefined profit potential if stock moves above or below the upper or lower breakeven i.e., 17843 and 18457. Max loss (i.e., equal to premium) if underlying closes between 18100—18200.

Impact of volatility jumps

• As volatility rises/jumps, buy option positions' prices rise - and so do Long strangle option strategy prices - tend to rise if other factors such as stock price and time to expiration remain constant. Therefore, when volatility increases, long strangles increase in price and make money. When volatility falls, long strangles decrease in price and lose money, a positive “vega” for the portfolio of options, i.e. the Long strangle option strategy. The above is assuming that, there is a movement in volatility of the underlying stock, but price and DTE is constant for the underlying stock.

Impact of time decay or theta decay:

• The time value component of an option's total price decreases as expiration approaches. This is time decay. Since long strangles consist of two long options, i.e. call option and put option, the sensitivity to time erosion is higher than for single-option positions. Long strangles tend to lose money rapidly as time passes and the stock price does not change, or fluctuates marginally.