A Long Strangle is an options trading strategy designed to profit from high volatility in the market. It involves buying two out-of-the-money options—a call and a put—with the same expiration date but different strike prices.
How it Works
- Buy a call option with a higher strike price than the current market price.
- Buy a put option with a lower strike price than the current market price.
- Both options have the same expiration date and underlying asset.
When to Consider
- Earnings Reports—Before a company announces earnings, traders anticipate a sharp price swing but don’t know if it will be up or down.
- Economic Announcements—Events like Federal Reserve rate decisions or inflation reports can trigger large market moves.
- FDA Approvals—Pharmaceutical stocks often experience big price shifts when drug approvals or rejections are announced.
- Merger & Acquisition Rumors—If a company is rumored to be acquired, its stock price may jump or drop significantly.
Profit and Loss
- Maximum profit occurs if the asset makes a big move in either direction—either rising significantly above the call strike price or dropping below the put strike price.
- Maximum loss is limited to the total premium paid for both options.
- Breakeven points are calculated by adding/subtracting the total premium paid from the respective strike prices.
Traders use the Long Strangle strategy when they expect high volatility but are uncertain about the direction of the price movement. Commonly applied before earnings reports, economic announcements, or major news events that could cause a stock to swing dramatically.
In investing, hype can lead to irrational decision-making, pushing asset prices beyond reasonable valuations. Strategies like the Long Strangle are powerful tools, but they require careful analysis of volatility, timing, and risk management to be effective.
