In finance, a strangle is an investment strategy involving the purchase or sale of particular option derivatives that allows the holder to profit based on how much the price of the underlying security moves, with relatively minimal exposure to the direction of price movement. The purchase of particular option derivatives is known as a long strangle, while the sale of the option derivatives is known as a short strangle. It is related to a similar option strategy known as a straddle.

[edit] Long strangle

Payoffs of buying a strangle spread.

The long strangle involves going long (buying) both a call option and a put option of the same underlying security. Like a long straddle, the options expire at the same time, but unlike a straddle, the options have different strike prices. The owner of a long strangle makes a profit if the underlying price moves far enough away from the current price, either above or below. Thus, an investor may take a long strangle position if he thinks the underlying security is highly volatile, but does not know which direction it is going to move. This position is a limited risk, since the most a purchaser may lose is the cost of both options. At the same time, there is unlimited profit potential.^[1]

[edit] References

[edit] External links

• Long and Short Strangles Illustrates component options in long and short strangles.