Strangle
Candlefocus EditorThe reason for the popularity of the strangle is that it provides the investor with protection from both directions. By holding both a call and a put on the same asset, the investor becomes "long" in the event that the asset price rises, and "short" in the event that it falls. This means the investor profits if the asset rises or falls significantly, though it does limit how much the investor stands to gain in either direction.
To generate a profit, the seller of the strangle must correctly anticipate a dramatic surge in the underlying asset’s price. If the price does not move far enough in either direction, the options will expire worthless and the investor will be out any premiums they paid.
In order to facilitate the strangle, each option must be purchased separately, and thus the investor has to pay two different premiums. This makes the strangle a costlier option strategy than some more conservative options strategies.
To maximize potential gains while avoiding significant losses, some investors set predetermined “pain points”—points at which they exit the option. If a predetermined price point is reached, the trader wants to exit the option before it becomes unprofitable.
Overall, the strangle is a popular options strategy employed by traders seeking to make large gains from rapid price shifts in the underlying asset by holding both long and short positions. However, the risk for the investor is larger when using the strangle strategy, as the asset must shift significantly to generate a profit.