← Strategy LabLesson 22 · 4:09
Long strangle
Summary
Use a long strangle when you expect a big move either way but the straddle costs too much. You buy the $105 call for $158 and the $95 put for $141, paying $299, which is the most you can lose anywhere from $95 to $105. There is no limit on the gain above, the gain below climbs until XYZ reaches zero, and you break even at $92.01 or $107.99.
Key terms
- long strangle
- Buying an out-of-the-money put and an out-of-the-money call with the same expiry; cheaper than a straddle but needs a bigger move.
- flat bottom
- The stretch between a strangle's two strikes where the last-day result is the same full loss of what you paid.
- time value
- The rest of an option's price, paid for the chance things get better before the end, and gone by the last day.
- volatility
- The size of the swings a stock is expected to make, written as a yearly percentage, saying how far but not which way.
- break-even on either side
Check yourself
Answer each question to see why the right answer is right.
1. What does this long strangle cost in all?
2. XYZ ends at $105 on the last day. What is your result?
3. Where do you break even on the last day?
4. XYZ ends at $90 on the last day. What is your result?
5. Compared with the $686 straddle, which is true of the strangle?
Finished the video and the quiz? .