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Long Strangle (Buy Strangle) Options Trading Strategy Explained

Published on 4/19/2018 1:28:21 AM | Modified on Tuesday, May 29, 2018

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Long Strangle (Buy Strangle)
Long Strangle (Buy Strangle) Options Strategy
Strategy LevelBeginners
Instruments TradedCall + Put
Number of Positions2
Market ViewNeutral
Risk ProfileLimited
Reward ProfileUnlimited
Breakeven Pointtwo break-even points

The Long Strangle (or Buy Strangle or Option Strangle) is a neutral strategy wherein Slightly OTM Put Options and Slightly OTM Call are bought simultaneously with same underlying asset and expiry date.

This strategy can be used when the trader expects that the underlying stock will experience significant volatility in the near term.

It is a limited risk and unlimited reward strategy. The maximum loss is the net premium paid while maximum profit is achieved when the underlying moves either significantly upwards or downwards at expiration.

The usual Long Strangle Strategy looks like as below for NIFTY current index value at 10400 (NIFTY Spot Price):

Options Strangle Orders
OrdersNIFTY Strike Price
Buy 1 Slightly OTM PutNIFTY18APR10200PE
Buy 1 Slightly OTM CallNIFTY18APR10600CE

Suppose Nifty is currently at 10400 and due to some upcoming events you expect the price to move sharply but are unsure about the direction. In such a scenario, you can execute long strangle strategy by buying Nifty Put at 10200 and buying Nifty Call at 10600. The net premium paid will be your maximum loss while the profit will depend on how high or low the index moves.

When to use Long Strangle (Buy Strangle) strategy?

A Long Strangle is meant for special scenarios where you foresee a lot of volatility in the market due to election results, budget, policy change, annual result announcements etc.

Example

Example 1 – Stock Options:

Let's take a simple example of a stock trading at ₹40 (spot price) in June. The option contracts for this stock are available at the premium of:

  • July 35 Put - ₹1
  • July 45 Call - ₹1

Lot size: 100 shares in 1 lot

  1. Buy 'July 35 Put': 100*1 = 100
  2. Buy 'July 45 Call': 100*1 = 100

Net Debit: ₹100 + ₹100 = ₹200

Now let's discuss the possible scenarios:

Scenario 1: Stock price remains unchanged at ₹40

In this situation,

  • July 35 Put - Expires worthless
  • July 45 Call - Expires worthless
  • Net Debit was ₹200 initially paid to take the position.
  • Total Loss = ₹200

The total loss of ₹200 is also the maximum loss in this strategy.

Scenario 2: Stock price goes above ₹50

In this situation,

  • July 35 Put - Expires worthless
  • July 45 Call Expires in-the-money with an intrinsic value of (50-45)*100 = ₹500
  • Net Debit was ₹200 initially paid to take the position.
  • Total Profit = ₹500 - ₹200 = ₹300

Scenario 3: Stock price goes down to ₹30

In this situation,

  • July 35 Put Expires in-the-money with an intrinsic value of (35-30)*100 = ₹500
  • July 45 Call - Expires worthless
  • Net Debit was ₹200 initially paid to take the position.
  • Total Profit = ₹500 - ₹200 = ₹300

Example 2 - Bank Nifty

Long Strangle Example Bank Nifty
Bank Nifty Spot Price8900
Bank Nifty Lot Size25
Long Strangle Options Strategy
Strike Price(₹)Premium(₹)Total Premium Paid(₹)
(Premium * lot size 25)
Buy 1 OTM Call90002005000
Buy 1 OTM Put88001002500
Net Premium (200+100)3007500
Upper Breakeven(₹)Strike price of Call + Net Premium
(9000 + 300)
9300
Lower Breakeven(₹)Strike price of put - Net Premium
(8800 - 300)
8500
Maximum Possible Loss (₹)Net Premium Paid7500
Maximum Possible Profit (₹)Unlimited
On Expiry Bank NIFTY closes atNet Payoff from 1 OTM Call bought (₹) @9000Net Payoff from 1 OTM Put Bought (₹) @8800Net Payoff (₹)
8000-50001750012500
8300-5000100005000
8500-500050000
9000-5000-2500-7500
93002500-25000
95007500-25005000
980015000-250012500

Market View - Neutral

When you are unsure of the direction of the underlying but expecting high volatility in it.

Actions

  • Buy OTM Call Option
  • Buy OTM Put Option

Suppose Nifty is currently at 10400 and you expect the price to move sharply but are unsure about the direction. In such a scenario, you can execute long strangle strategy by buying Nifty at 10600 and at 10800. The net premium paid will be your maximum loss while the profit will depend on how high or low the index moves.

Breakeven Point

two break-even points

A Options Strangle strategy has two break-even points.

Lower Breakeven Point = Strike Price of Put - Net Premium

Upper Breakeven Point = Strike Price of Call + Net Premium

Risk Profile of Long Strangle (Buy Strangle)

Limited

Max Loss = Net Premium Paid

The maximum loss is limited to the net premium paid in the long strangle strategy. It occurs when the price of the underlying is trading between the strike price of Options.

Reward Profile of Long Strangle (Buy Strangle)

Unlimited

Maximum profit is achieved when the underlying moves significantly up and down at expiration.

Profit = Price of Underlying - Strike Price of Long Call - Net Premium Paid

Or

Profit = Strike Price of Long Put - Price of Underlying - Net Premium Paid

Max Profit Scenario of Long Strangle (Buy Strangle)

One Option exercised

Max Loss Scenario of Long Strangle (Buy Strangle)

Both Option not exercised

Disadvantage of Long Strangle (Buy Strangle)

The strategy requires significant price movements in the underlying to gain profits.

How to exit?

  • If the price of the underlying moves up, sell the Call and profit from Put.
  • If the price of the underlying moves down, sell the Put and profit from Call.

Simillar Strategies

Long Straddle, Short Strangle

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