A strangle is a versatile options strategy that encompasses the simultaneous purchase or sale of a call option and a put option on the same underlying asset. Both options within the strangle possess an identical expiration date but differ in their strike prices. This strategy is commonly adopted by traders when they foresee substantial price volatility in the underlying asset but are uncertain about the specific direction in which the price might move—whether it will increase or decrease.
Traders deploy a strangle to capitalise on potential market movement, aiming to benefit from the asset’s price fluctuation irrespective of whether it trends upwards or downwards. By incorporating options with distinct strike prices but the same expiry, traders aim to take advantage of price swings and aim to profit from the market’s volatility.
In a strangle strategy, the call option is typically purchased above the current market price, while the put option is usually bought below the prevailing market price. This positioning allows traders to profit from significant price movements, enabling them to mitigate potential losses in case the market doesn’t exhibit substantial movement. However, if the asset price remains stable, the options may expire worthless, resulting in a loss limited to the total premium paid for both options.