Strangle

A strangle is an options strategy where a trader buys (or sells) both a call and a put on the same underlying stock, with the same expiration date, but at different strike prices. A call option gives the right to buy the stock at a set price; a put option gives the right to sell it at a set price. By holding both at once, the trader is positioned for a move in either direction, rather than betting on the stock going strictly up or strictly down.

In the most common version, the "long strangle," a trader buys an out-of-the-money call (a strike above the current stock price) and an out-of-the-money put (a strike below the current stock price). Because both options start out-of-the-money, the combined cost is usually cheaper than a comparable straddle, which uses matching at-the-money strikes. The trade profits if the stock makes a large enough move up or down before expiration to cover the total premium paid; if the stock sits still, both options can expire worthless and the premium is lost.

The nuance that trips people up is that a strangle needs a bigger move than a straddle to become profitable, precisely because the strikes are spread apart rather than centered on the current price. It also loses value from time decay on both legs simultaneously, and that decay accelerates as expiration approaches, so a slow, grinding move in the right direction can still lose money if it doesn't happen fast enough. There is also a "short strangle," where a trader sells both the call and put instead, collecting premium and betting the stock stays between the two strikes; that version has limited profit but theoretically large risk if the stock breaks out sharply.

Strangles are typically used around events with uncertain but potentially large outcomes, like earnings announcements, where the direction of the move is unknown but a big move is expected.