A long strangle is an options trading tactic employed by investors seeking to capitalise on anticipated significant price fluctuations in an underlying asset while remaining uncertain about the specific direction of the price movement. This strategy involves the simultaneous purchase of both a call option and a put option, each with the same expiration date but differing strike prices.
In a long strangle, the investor purchases a higher-priced out-of-the-money call option and a lower-priced out-of-the-money put option. The out-of-the-money nature of these options means that their strike prices are situated at levels where they are not profitable if exercised immediately. However, they become profitable if the underlying asset’s price undergoes substantial movement.
The primary objective of implementing a long strangle strategy is to benefit from significant price swings in the asset, regardless of whether the price ascends or descends. If the market price moves significantly in either direction before the options expire, one of the options will yield profits, while the other will likely expire worthless. Conversely, if the asset’s price remains relatively stable, both options may expire worthless, leading to a limited loss equivalent to the initial premium paid to purchase the options. This strategy enables traders to take advantage of heightened market volatility without needing to predict the specific price movement direction.
To find out what is a short strangle click here. What is a short strangle?