A strangle holds an out-of-the-money call and an out-of-the-money put at the same expiration. It costs less than a straddle and needs a larger move to pay, trading probability for price.
A strangle buys (or sells) an out-of-the-money call above the stock and an out-of-the-money put below it, on the same expiration. Like a straddle it is a bet on movement rather than direction, but both options start out of the money, so it is cheaper and needs a bigger move to pay.
A $100 stock with 30 days to expiration and a flat 30% implied volatility (model prices). A long strangle buys the 105 call for $1.66 and the 95 put for $1.33.
| Stock at expiration | Worth at expiration | Profit or loss per contract |
|---|---|---|
| $85 | Put worth $10 | +$701 |
| $90 | Put worth $5 | +$201 |
| $95 to $105 | Both expire worthless | -$299 |
| $110 | Call worth $5 | +$201 |
| $115 | Call worth $10 | +$701 |
| On the same $100 stock, 30 days | Straddle (100/100) | Strangle (95/105) |
|---|---|---|
| Cost | $685 | $299 |
| Breakevens | $93.15 and $106.85 | $92.01 and $107.99 |
| Model chance of finishing outside the breakevens | About 43% | About 35% |
| Loss if the stock does not move | The full $685 | The full $299 |
The strangle risks less than half as much and needs a slightly larger move. That is the trade: probability for price.
Selling the same strangle collects $299 and keeps it if the stock finishes between 95 and 105, with undefined risk in both directions beyond the breakevens. Defined-risk disciplines express the same range view as an iron condor instead: bought wings further out cap the worst case at a known number, at the cost of part of the credit. The screening that applies to selling the range is in iron condor entry screening.
Strangle strikes are commonly placed by delta (for example, both options near 0.15 to 0.30) or by the expected move, so the two sides sit at similar implied odds. Around earnings, the first out-of-the-money strangle also refines the implied-move estimate the straddle anchors, covered in earnings and implied moves.
Add the total premium to the call strike for the upper breakeven and subtract it from the put strike for the lower one. A 95/105 strangle bought for $2.99 breaks even at $107.99 and $92.01.
Yes, because both options start out of the money. In the worked example the strangle costs $299 against $685 for the straddle, but the stock has to move further before it pays.
It is undefined in both directions beyond the breakevens, since no option is bought to cap the loss. An iron condor expresses the same range view with bought wings that set a known maximum loss.