Strangle
A strangle is an options strategy involving the purchase (or sale) of an out-of-the-money call and an out-of-the-money put on the same underlying stock and expiration date, at different strike prices.
A strangle is the lower-cost cousin of the straddle. Instead of buying ATM options at the same strike, the strangle buyer purchases an OTM call above the current stock price and an OTM put below it. This reduces the upfront premium because both options have less intrinsic value to begin with, but it requires a larger move in the underlying stock to reach profitability — the stock must clear the OTM call strike or fall below the OTM put strike by enough to recover the combined premium paid.
Suppose a stock trades at $100 with 30 days to expiration. A strangle buyer purchases the $105 call for $2.00 and the $95 put for $2.00, paying $400 total. The upper breakeven is $109 ($105 + $4), and the lower breakeven is $91 ($95 - $4). The stock must move at least 9% in either direction by expiration for the trade to be profitable. By contrast, a straddle at the $100 strike might cost $8.00, with breakevens at $108 and $92 — a smaller required move but a higher cost.
The long strangle is appropriate when a trader expects a very large move but wants to reduce the cost of the bet compared to a straddle. It is a directionally agnostic bet on magnitude. Like the straddle, it is most commonly placed ahead of major catalysts: earnings reports, clinical trial results, regulatory decisions, or macroeconomic announcements where the market's implied move may underestimate the actual volatility.
The short strangle — selling both OTM legs — is a popular premium-selling strategy. By collecting the credit from two OTM options, the seller profits if the stock remains within a wide range. The appeal is higher probability of profit than a straddle, since both strikes are OTM. The risk is undefined: the stock can theoretically rise or fall without limit, and unlike an iron condor, there are no protective long strikes to cap the loss. Short strangles are generally reserved for experienced traders who actively manage position risk.
Tastyworks (now Tastytrade) and similar platforms have popularized the 'short 1-standard-deviation strangle' — selling the approximately 16-delta call and 16-delta put — as a mechanical premium-selling strategy with roughly 68% theoretical probability of full profit.