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What is a strangle?

What is a strangle?

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.

Keywords: bullish, bearish, strike price, options trading, strangle, straddle, in the money, Out of The Money (OTM), neutral strategy, calls, puts,