The Strangle Stock Option Spread
Outlook: High Stock Volatility
When you setup a strangle option position you are going long volatility, which means you are betting that the underlying equity will shift significantly by the time the options expire. The beauty of the strangle position is that the underlying equity can either go significantly up or significantly down, and you will make money either way. You lose money if the underlying equity doesn't fluctuate that much.
A strangle is very similar to a straddle, but it is slightly more risky. To setup a strangle, you go long (buy) an equal amount of call options and put options. The call options have a strike price higher than the current market price, and the puts have a strike price lower than the current market price. That way if the underlying equity goes way up, the put options expire worthless and you make a profit on the call. If the underlying equity goes way down, the call options expire worthless and you profit on the put options. In order for you to profit, the underlying equity has to go up or down by an amount greater than the price your paid for both the call and the put. In order word, you have to cover your cost for both the call and the put to break even.