Strangle

Long Strangle

A Long Strangle is the simultaneous purchase of an OTM Call and an OTM Put, with the same expiration.

Payoff Diagram:

Direction Assumption: Neutral

Maximum Profit: Unlimited

Maximum Loss: Limited to net debit paid. Maximum Loss occurs when the underlying is between the two strike prices at expiration, where both the Long Call and Long Put expires worthless.

Breakeven Price: • On the lower end, Long Put strike minus the net debit paid. • On the higher end, Long Call option strike plus the net debit paid.

Theta: Passage of Time -> Negative Effect The net effect of time decay is negative.

Volatility: If Volatility decreases -> Negative Effect. If Volatility increases -> Positive Effect. Long Strangles are Vega positive, meaning that if volatility increases, the position gains value. Therefore, Long Strangles are best to be entered when volatility is relatively low.

Short Strangle

A Short Strangle is the simultaneous sale of an OTM Call and an OTM Put, with the same expiration.

Payoff Diagram:

Direction Assumption: Neutral

Maximum Profit: Limited to the net credit received. Maximum Profit occurs when the underlying is between the two strike prices at expiration.

Maximum Loss: Unlimited

Breakeven Price: • On the lower end, Short Put strike minus the net debit paid. • On the higher end, Short Call strike plus the net debit paid.

Theta: Passage of Time -> Positive Effect The net effect of time decay is positive.

Volatility: If Volatility decreases -> Negative Effect. If Volatility increases -> Positive Effect. Long Strangles are Vega positive, meaning that if volatility increases, the position gains value. Therefore, Long Strangles are best to be entered when volatility is relatively low.