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What is a strangle?

In the dynamic world of finance, there are a variety of investment strategies that one can adopt. Among these strategies, options trading has emerged as an attractive avenue for investors due to its inherent ability to provide diverse payoff profiles. One such strategy is known as a 'strangle,' a type of options trading strategy that leverages the potential for substantial price movements in an underlying asset.

A strangle involves holding both a call and a put option on the same underlying asset. These options have identical expiration dates, but the strike prices are different. The call option's strike price is set above the current market price, while the put option's strike price is set below the current market price. Essentially, a strangle strategy covers investors who predict a significant asset price movement but are uncertain of the direction it will take. This strategy can yield substantial returns if the underlying asset does swing dramatically in price, either upward or downward.

The strategic execution of a strangle involves selecting an underlying asset with anticipated price volatility around a specific options expiration date. The trader, however, remains unsure of the directional movement. In this situation, both a call and a put option are purchased, positioned slightly out of the money. This element sets the strangle strategy apart from a similar options strategy known as the 'straddle.'

The increased risk with a strangle strategy arises from the fact that the maximum loss, i.e., the invested premium, is larger compared to a straddle. Since the call and put options in a strangle are purchased at strike prices on either side of the current market price, any price between these strike prices will not yield gains. Thus, if the price of the underlying asset does not move significantly, or if it moves but stays between the strike prices of the options, the investor will lose the premium paid for the options.

A strangle is an options trading strategy designed to capitalize on the volatility of an underlying asset. It offers the potential for high returns if the asset experiences substantial price movement, regardless of the direction. It is a relatively affordable strategy compared to a straddle but carries a higher risk due to the possibility of a total loss of the invested premium. Hence, the strangle strategy requires careful analysis, astute judgment of market volatility, and a healthy appetite for risk from the investor. With these factors in place, a strangle can become a profitable tool in an investor's financial arsenal.


Summary:
A strangle is an options strategy which is profitable if the price of the underlying security swings either up or down because the investor has purchased a call and a put just out of the money on either side of the current price of the underlying.

To execute a strangle an investor chooses an underlying security which he or she anticipates will experience some price volatility around a given expiration date for options, but is not sure which way it will go, so a call and a put are both purchased.

This is almost the same thing as a "straddle" strategy, except that the strangle position can be taken up for slightly less premium dollars, because the call and put options purchased are both slightly out of the money in this case, but they are purchased at-the-money in a straddle. The call will be purchased at a strike price out-of-the-money above the current market prices, and the put will be purchased out of the money below the current market price.

The chances of losing the invested premium money (the maximum loss) are larger with a strangle than a straddle because all the prices in between the two different strike prices are going to give the investor no gains. But, the position is slightly less expensive to purchase than a straddle, since the options are out-of-the-money.

 Disclaimers and Limitations

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