List of Financial Market Terms

A Strangle is used in options trading, and is a strategy where an investor has both a call and put position with different strike prices,  but with the same maturity and on the same underlying asset.

A Trader will buy a Strangle if they believe a stock is going to make a big move, but are uncertain as to the direction of the move.  A long Strangle allows the Trader to profit regardless of the direction as long as the move is large enough to push the spread into a profitable level.  Max loss is the cost of the spread while max gain is theoretically unlimited. 

Buying a Strangle has pros and and cons.  Pros are you can make money if the stock moves up or down.  Cons are reaching the profit zone requires a large move in the stock which typically means there is high volatility priced into that stock.  The volatility premium carries into the options used in the spread making it much harder to move into the profit zone.

Here's a visual of a long Strangle:

buying a strangle options spread

A Trader will sell a Strangle if they believe the underlying asset is going to stay in a specified range.  Max gain is the credit obtained from selling the spread while max loss is theoretically unlimited.  This may seem unfavorable, but can be very lucrative if done correctly. 

Traders often sell Strangles into earnings releases.  This may seem counter intuitive, but remember the comment about volatility premiums.  Implied Volatility is usually quite high prior to a release, resulting in much higher extrinsic value than usual in the options price.  This translates to a spread that requires a massive move to get into the profit zone, therefore making it more favorable to sell the spread allowing you to profit off the decay in volatility premium after the earnings release goes public.

Here's a visual of a short Strangle:

selling a strangle options spread

Related Terms: Straddle, Iron Condor, Butterfly, Delta, Gamma, Theta, Vega.

Open a thinkorswim by TDA account today!