Long strangle

Article contents



At a glance



Setting up the strategy


  1. Buy one out-of-the-money (OTM) call option on the underlying stock.

  2. Buy one out-of-the-money (OTM) put option on the same underlying stock.
Ideally you want the stock to go up or down significantly to attain the most profit.

Who should run this?


Advanced traders only.

Margin requirements


Learn more about Questrade’s option margin requirements.

Strategy overview



A strangle is an options strategy in which a trader buys (or sells) one out-of-the money put and one out-of-the money call of the same symbol simultaneously, each with different strike prices, but identical expiration dates.


There are two types of strangles:


Strangle type Description
Long strangle
Used by a trader who thinks the security will experience considerable, short-term volatility.

Gives the option holder the right to buy or sell the stock at the fixed strike prices.
Short strangle
Used by a trader who thinks the security will experience limited, short-term volatility, or stay stagnant until expiration.

If the options are assigned, the option holder is obligated to buy or sell the stock at the fixed strike prices.

To learn more, see Short strangle.

Market outlook


  • Neutral

Strategy benefits


  • Allows you to profit whether the underlying stock price appreciates or depreciates in value.
  • Unlimited profit if the stock continues to move up or down.
  • Maximum loss is limited to the option premium paid.
  • Lower cost to enter into this strategy than the long straddle strategy.
  • Profit potential is higher than the long straddle strategy.

Strategy downsides


  • Loss occurs if the stock stays stagnant
  • Loss can occur if the underlying stock price moves above or below the strike price, but below the upper or above the lower break-even points.

Long strangle example



Scenario


Let’s say that ABC shares are currently trading at $70 in September. To employ a long strangle, you purchase a $60 October put option for $75 and simultaneously buy a $80 October call option, also for $75.

To enter into this position, you will be debited $150.

Possible results


  1. At expiration, ABC shares are trading at $70, meaning both the call and put options expire worthless.  Your total loss would be the initial debit to enter the trade.

  2. At expiration, ABC shares are up significantly at $85, meaning the put option expires worthless. However, the $80 call option would expire in the money and the option would be assigned. The call option’s intrinsic value would be $500, and your profit would be $350 after subtracting the initial debit of $150 to enter the strategy.

Profit and loss explained



Maximum profit


When employing a long strangle strategy, it is possible to obtain significant gains when the stock price moves away from the strike price.

  • Stock value moves upward at expiration
    Maximum profit = stock price – strike price of long call option – option premium paid
  • Stock value moves downward at expiration Maximum profit = strike price of long put – stock price – option premium paid

Maximum loss

Maximum loss = option premium paid

Break-even at expiration

There are two break-even points:


  • Break-even = strike price of long call + option premium paid per share
  • Break-even = strike price of long put - option premium paid per share

Sample calculations



  • Stock value at start of strategy: $70
  • To execute the strategy: Buy $60 put option for $75, Buy $80 call option for $75
  • Result: $150 net debit
Stock price at expiration Profit and loss calculations 
$70 $1.50 (option premium paid per share)
x 100 (number of shares in option contract)
= $150 loss
$85 $85(stock price)
-$80 (strike price of long call option)
-1.50 (option premium paid per share)
x 100 (number of shares in option contract)
= $350 profit


Note
: commission fees are not included in the above calculations.


Payoff diagram






Creating a long strangle






Standard order details

Order detail

Description

Symbol lookup field

Click  and change the mode to . Then enter the symbol you want to buy or sell. The default expiration date, strike price, and strategy appear. 




Tip: click the Option tab to view a more detailed option quote.

Modify the expiration date, strike price, and option strategy accordingly. For more information, see Elements of an option quote.
Action

The buy or sell action is set for you when you select the strategy type.

Qty

Select a value using the arrows , or enter a value manually.

Note: by default, the quantity will be populated with the value set in your user preferences.
Order type Select the type of order you want to submit. When creating strategy orders, only Limit or Market order types are available. For more information, see Order types.

The limit order type requires you to fill in additional fields. Refer to the table section below for details.
Duration

Select a duration to specify how long the order should remain active. For more information, see Order durations.

Route Select a route or leave the selection at Auto to let the platform determine the best one. Canadian routes will be listed for Canadian symbols and U.S. routes will be listed for U.S symbols.
Sub-route

This field will be filtered according to the route selection. It indicates where you prefer the order to be executed. Leave the selection at Auto to let the platform determine the best route.

Note: sub-route selection is only available for Canadian symbols.
Order type-specific details
Limit price Enter your limit price:

  • To have the price fluctuate according to real-time data, select . The icon changes to a lock icon , which locks the limit price. Once locked, use the refresh button to automatically update your limit price.
  • To choose a custom price, select .
Note: if real-time market data is not available, the limit price will be blank and the float limit icon will be unlocked.






Note: the video tutorial above shows how to create a long strangle strategy using IQ Edge; however, the principles are the same for IQ Web.
Tip: for an optimized viewing experience, watch the video on YouTube in full 720p HD. To open the video in YouTube, click the YouTube button in the bottom right corner of the video window and select the change settings icon to modify the video quality.


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