A long strangle is an options strategy that involves buying one out-of-the-money call and one out-of-the-money put on the same underlying with the same expiry but different strikes. Like a straddle, it profits from a large move in either direction — but at lower premium cost and wider breakevens.
Because both legs are out-of-the-money, the total premium paid is lower than a straddle. The trade-off: the underlying must move more before the strangle turns profitable. Breakevens are: call strike + total premium (upside) and put strike − total premium (downside).
Strangles are preferred when the trader expects a very large move but wants to spend less upfront and is willing to risk being slightly wrong on the magnitude.
Example 1: Nifty is at 24,000. A trader buys the 24,500 call at premium 80 and the 23,500 put at premium 70 — total cost 150 points (vs ~290 for the ATM straddle). To profit, Nifty must close below 23,350 or above 24,650 by expiry. The breakeven band is wider but the cost is lower.
Example 2: A trader expects a 5% move in Bank Nifty over the next month ahead of an RBI policy and earnings cluster. They buy a 5%-OTM strangle. If Bank Nifty moves only 3%, the trade loses; if it moves 6% in either direction, it pays off. The trade was cheaper than a straddle but required higher conviction in magnitude.
Strangles, like straddles, are exposed to theta decay (time decay accelerating near expiry) and IV crush (volatility falling after an event). The further OTM the strikes, the steeper the theta decay relative to premium.
Disclaimer: Educational content from MintByte (ARN-314872, MFD). Examples are illustrative. SEBI Investment Adviser registration is in process; we do not recommend specific options trades. Options trading involves substantial risk.