Exploring the Risk/Reward of Strangle Options Trading
A strangle is an options position that combines an out-of-the-money call and an out-of-the-money put on the same stock with the same expiration. Buying both (a long strangle) profits if the stock moves far in either direction; the most you can lose is the total premium paid. Selling both (a short strangle) profits if the stock stays between the two strikes; you keep the premium, but losses are unlimited on the upside and very large on the downside.
Try it in your own spreadsheet
Get the free MarketXLS sample workbook (.xlsx).
No account needed. MarketXLS live data requires a paid plan. Preview workbook
Explore more videos
How a strangle is set up
In a strangle, the call strike is above the current stock price and the put strike is below it. For example, with a stock at $100, a strangle could use a $110 call and a $90 put expiring on the same date. Because both options are out of the money, a strangle costs less than a straddle (which uses at-the-money options), but the stock must move further before a long strangle profits.
Long strangle risk, reward and breakevens
- Maximum loss: the total premium paid for the call and put, if the stock finishes between the strikes at expiration.
- Upper breakeven: call strike + total premium.
- Lower breakeven: put strike − total premium.
- Maximum profit: unlimited on the upside; on the downside, up to the put strike minus the premium (the stock cannot fall below zero).
Short strangle risk, reward and breakevens
- Maximum profit: the total premium received, if the stock finishes between the strikes.
- Breakevens: the same two points as the long strangle.
- Maximum loss: unlimited if the stock rises far above the call strike, and large if it falls far below the put strike. Short strangles usually require margin and a high options approval level.
How implied volatility and time decay affect strangles
Implied volatility sets the price of both options. When implied volatility is high, premiums are larger: a long strangle costs more and needs a bigger move, while a short strangle collects more. A fall in implied volatility after entry hurts a long strangle and helps a short one.
Time decay works the same way. Both options lose time value every day, which hurts the buyer of a strangle and helps the seller. Long strangles are usually opened ahead of an expected catalyst, such as earnings, where a large move is possible.
Managing a strangle
Common risk controls are closing the position at a preset profit or loss, rolling the threatened side to a different strike or expiration, and sizing positions so a large move against a short strangle does not cause an outsized loss.
For related analysis, see the Short Strangle Option Strategy template and the option implied-volatility guide. This article is educational, not investment advice; options involve significant risk.
